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securities based lending
15 Jul 2019

Securities-Based Lending: A Guide to Using Investments as Collateral

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Did you know you can use your investment securities as collateral in order to secure a loan? These types of loans can be used for almost any purpose, from buying real estate to investing in a new business.

You cannot, however, use the loans for other securities-based transactions, such as buying stocks. Often, these securities-based loans are available only to those investors who have a substantial amount of money invested in securities.

This lending option differs from securities lending, in which investors borrow securities to short-sell stocks or other assets. Continue reading here to learn more about securities-based lending (SBL) and how they can help you.

The Benefits to Investors

This lending option offers several different benefits to investors. The most notable benefit is the freedom to continue earning money on present investments.

Without selling any existing investments, the investor can get access to cash in as little as a few days. Because the investor avoids selling their securities, they avoid the tax bill they would otherwise accrue.

This lending option offers lower interest rates than some other types of loans. Additionally, repayment options are often more flexible than home equity lines of credit, second mortgages, and other types of unsecured loans.

These loans are best for emergency situations when you might need a large amount of cash on short notice. You may not want to hold onto the loans for long periods of time due to some of the inherent risks.

The lender often benefits from these types of loans as well.

Risks to Investors

As with any loan or investment, there is a certain amount of risk which comes along with it. Because you use your securities as collateral, your risk is dependent on the fluctuation of the market.

Although an economy may be stable, it’s not uncommon to see dramatic shifts in prices over short periods of time. If the lending institution decides to force liquidity, you could find yourself selling a security at an unattractive price.

In these cases, you know longer have the chance to see the market recover. You must sell your assets and give up any possible future gains.

If the firm does decide to sell your securities, you may face tax consequences. You will need to treat any capital gains as such.

As a borrower, you may run into a problem if the borrower won’t accept a certain security as collateral. This happens when a certain security loses its luster. A once well-respected company may find itself losing profits for whatever reason.

Unless you have another security or securities to offset this deficiency, the lender may deny you a loan or line of credit.

There is an increase in interest concerning securities-based lending. This leads lenders to have a concern for the future.

Some financial experts worry securities-based lending may lead to long-term stress to the financial system. They may wish to be more conservative about the loans they approve.

A Look at the Securities-Based Lending Process

Simply put, a financial firm may grant you access to cash in exchange for your securities as collateral. The firm will need to already manage the specific securities in question.

You can use a variety of different securities from your portfolio, such as stocks and bonds.

Often, these loans come in the form of a line of credit. To access the funds, you write a check or transfer funds against the line of credit.

Because your securities serve as collateral, your line of credit may fluctuate with the prices of the individual securities. You can always expand your line of credit with additional securities or cash as collateral.

Like any other line of credit, you can pay down the outstanding balance.

The firm will set a “cure period,” ranging from about 2 to 30 days in length. If you fail to expand your line of credit or pay down the balance, the firm may liquidate your account.

How Much Can You Borrow?

This lending option is often best for high net worth individuals. Borrowers can receive anywhere between $100,000 and $5,000,000, depending on the value of the portfolio you hold with the firm.

Some individuals may be able to borrow more or less.

Though one might associate these loans with the ultra-wealthy, they can still be an option for an average borrower. Many firms will allow you to borrow between 50% and 95% of the total value of your portfolio.

This will depend on the types of securities you hold as well as the quality of the securities.

Keep in mind the market may fluctuate over the term of your loan. If this is a concern for you, you may wish to borrow less against your securities.

You should speak with the firm to find out more about your borrowing options. Not all firms work in the same fashion. Some may be willing to offer securities-based loans for portfolios with lower values.

Keep in mind it’s not just individuals who can benefit from securities-based lending. Joint investors and revocable trusts can benefit from this lending option.

The firm may tailor your payment options to fit your needs. More often than not, the loan term will be between 1 and 5 years.

Diversity Is Your Best Friend

When it comes to investments and the stock market, it’s always a good idea to diversify your portfolio. This is one of the most beneficial risk management strategies.

You can never predict with certainty what the stock market might do, especially over a long period of time. Having a diversified portfolio can help protect your investments against volatile market conditions.

The ideology is that having investments across different types of securities will result in lower risk.

When you seek securities-based loans, this can be useful. You’ll have a greater array of securities to borrow against.

This may allow the lender to view your potential as a borrower in a more positive light, especially if the overall value of your portfolio isn’t huge.

Here are some essential tips to making sure you have a well-diversified portfolio:

Keep an Eye on Your Portfolio

Investing is an art form which demands constant practice and ambition for mastery. You should consider adding to your investment account periodically.

Ideally, you’ll add the same amount to your portfolio on a specified schedule. This is a strategy known as dollar-cost averaging. You’ll buy more shares when prices are lower and fewer when prices are higher.

Over time, you’ll build a larger and stronger portfolio.

Buying and Holding

If you get into the stock market, you’ll need to figure out when you should buy and when you should hold. Stay in the know about your investments and pay attention to current events.

If you know what’s happening in the market and the companies in which you invest, you can know when to buy and sell.

Keep Thing Spicy in Your Portfolio

It may not be enough to say don’t put all your eggs in one basket. Someone could misinterpret this as an urge to buy stocks from different companies in different sectors.

In reality, you should look beyond stocks when you make investments. There are plenty of other investment options.

You can invest in real estate investment trusts (REITs), commodities, treasury bonds, and more.

Balancing Risk and Return

Anything which lowers your risk in the market will lower your potential returns. Those who take greater risks face greater reward. However, greater risks also come with greater potential for catastrophe.

You want to have a sound and sensible approach to the way you balance your risks and returns. You want to have a good mix of mostly stocks and bonds with some other securities mixed in.

Give yourself room to take a little risk, as this will help maximize your potential for returns. When you invest more in a single security, you increase your potential returns on that security.

Keep Things Manageable

Managing an investment portfolio can be hard enough as it is. When you start to diversify your portfolio, you add more securities to track.

If you diversify too much, you could end up with more securities than you can possibly manage. While you want variety in your portfolio, you don’t want to spread yourself too thin.

If you find yourself invested in hundreds of securities, you may not have the time or resources to manage them.

Try to keep your portfolio around 20 to 30 different investments. If you have someone managing your portfolio, you may be able to add more.

Check Out Your Lending Options

When it comes to your financial life, it pays to be knowledgeable. You want to know when to buy and hold stocks. You want to know when and how you can borrow money.

You can use your securities as collateral when you seek securities-based lending. This is great for those who have valuable stock portfolios.

Your options don’t stop there.

Are you looking for more lending options? Check out Bonsai Finance’s options for personal loans.

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