How Securities-Based Lending can Reduce Expenses

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Having readily available funds can help pave the way when you need to jump-start a new business venture, seize a timely investment opportunity or make an offer on your dream vacation home. Even planned milestones, like funding a child’s education, may present liquidity challenges if they come at a time when disrupting an investment strategy is not ideal. Using your investments as collateral for a securities-based line of credit (SBLOC) is one way to proactively secure access to funds when the need arises.

"A securities-based line of credit leverages the value of marketable securities—equities, fixed income, Treasurys and so on—held in a nonretirement investment portfolio to give you access to cash without the need to sell assets," explains Scott Landau, managing director of private banking at Fifth Third Private Bank. "It’s a great option for investors who want liquidity options without sacrificing investment potential or creating any tax ramifications."

The benefits of securities-based lending

So, what is securities-based lending? For investors with sufficient eligible securities, SBLOCs can be easier to establish than other borrowing options. Securities-based lending functions similar to a home equity line of credit, with lenders basing the maximum loan value on a borrower’s investment portfolio rather than equity owned in a home. However, because the underlying assets are easily quantified, the approval process can be more straightforward.

"This is not like other loans where you need to provide extensive documentation," says Chris Dosland, director of private banking at Fifth Third Private Bank. "All it typically takes is a credit score and proof of eligible collateral to be approved."

SBLOCs also offer flexibility. Borrowers can access any amount up to the initial credit line value as needed and pay interest only on the amount drawn and only for as long as they need it. There is no need to commit to an established time horizon for repayment, and funds can be used for any purpose except buying other securities.

"It’s like having readily available assets," says Landau. "If an opportunity arises, you are a cash buyer who can access funds immediately and make interest-only payments as long as your collateral stays in place." Borrowers are also free to continue making trades within the investment account as long as they maintain the required collateral levels to support the loan.

Another key benefit is cost efficiency. Interest rates on a SBLOC tend to compare favorably to other lending options. "Since it’s a low-risk form of lending, it’s an inexpensive way to borrow," says Dosland. "So, they’re simple, flexible and cost-effective."

SBLOCs may also offer significant tax advantages because the loan enables investors to avoid selling assets and triggering capital gains taxes on the sale. In addition, if the loan is used for business or investment purposes, the interest payments may also be deductible. Borrowers should always consult with a tax professional in advance to assess the ramifications of their specific situation.

Caveats and considerations

As with taking on any debt, potential borrowers should be aware of the risks and limitations associated with SBLOCs. Some asset classes, such as private equity holdings, retirement accounts and assets held outside the lending institution, may not qualify as collateral.

Market volatility is another consideration. While market fluctuations are generally accounted for when determining the amount of credit, should the value of the investments pledged as collateral drop significantly, borrowers may be subject to a margin call and required to provide additional collateral or repay part of the loan.

Your wealth management advisor can help ensure an appropriate level of leverage. "A good wealth manager will be very conservative in making sure you have plenty of room to weather volatility," notes Landau. "The amount we as lenders advance against assets will also vary depending on the level of volatility related to that investment -- fixed income versus equity."

Is a SBLOC an option for you?

Ultimately, a SBLOC is just one of many lending options available to borrowers. Determining the best option entails taking a holistic approach to assessing individual circumstances and identifying the solution that best fits your financial goals.

At Fifth Third Private Bank, that process often starts with a client stating that they have a project they would like to accomplish. "We respond with multiple possible solutions such as home equity loans and SBLOCs and explain what benefits they offer," says Landau. Equipped with the bank’s best thinking, clients can consider various options and costs and make a decision that best fits their current personal financial situation.

For more information on SBLOC rates and eligibility, contact your Fifth Third Private Bank advisor today.