An opportunity arises. Whether for a pied-à-terre in the city, a second home in the country, a vacation house at the beach—or other circumstances that require significant liquidity, such as tax planning, wealth transfers, or transformational charitable giving—why not leverage the power of your portfolio at your fingertips? Securities-based lending may afford the opportunity to free up available cash by using a portion of your eligible portfolio holdings as collateral.
Take advantage of the liquidity your assets can offer
Securities-based lending can potentially be a better means of accessing liquidity than other types of financing options. Proactively establishing a securities-based line of credit enables you to:
- Create ready cash for a litany of spending needs or smooth out intermittent or irregular cash flow
- Keep your investment strategy on track. Leveraging rather than liquidating a portion of your portfolio permits you to maintain market exposures, while continuing to earn dividends and interest, as well as the capital appreciation that could accrue from your investments
- Avoid potential taxable events by redeeming investments. Exercising your financial flexibility with your investments may help you avoid creating a steep tax obligation in the case of, say, selling a low-basis holding
Compared to other financing strategies, securities-based lending solutions also feature more:
- Competitive pricing (tied to attractive Secured Overnight Funding Rate, or SOFR)
- A simple, streamlined application process without fees or closing costs
Be aware of the risks
As with all financial transactions, there are potential risks in borrowing against your portfolio. Among them is the possibility that market volatility may greatly reduce the value of your holdings, magnifying loss and perhaps requiring you to repay the borrowed funds or deposit additional funds to act as collateral. This, in turn, could potentially lead to unintended tax consequences and/or hinder your long-term investment strategy. Another risk is that your loan’s low interest rate (which is based on a premium over SOFR, and will rise in tandem) could increase, making the loan more expensive than you originally anticipated.
While the risks of leveraging your investments to fund liquidity can never be completely avoided, they can be managed. One way to minimize potential risk is to not borrow more than a certain portion of the value of your securities that are collateralizing the loan. Being sure that an ample cushion appropriate for your balance sheet remains in place can serve as a risk buffer.
In the event that the market value of your collateralized securities falls precipitously—or below levels set out in your loan agreement—there could be a “collateral call,” which requires the immediate repayment of borrowed funds.* However, you may be able to reduce the likelihood of such an event by taking certain steps, such as:
- Selectively borrowing against less volatile investments (such as blue-chip stocks or U.S. Treasuries) that may be less likely to result in a collateral call to immediately repay funds
- Diversifying among asset classes that are not equally vulnerable to potential economic shocks, to help decrease the chance of a portfolio-wide dip**
- Careful monitoring of investments, particularly during volatile times, in an effort to anticipate and sidestep drawdown risk of capital loss (Drawdown is the peak-to-trough decline in a portfolio’s value, or the volatility of returns below a specified target return)
*Increases in variable interest rates will result in higher periodic payments.
**Diversification cannot ensure a profit or guarantee against a loss.
Please read important disclosures at the end of the article.