Understanding Securities-Based Lending

Securities-based lending is a type of credit that allows you to borrow money using securities in your investment portfolio as collateral. In this blog, we'll help you understand how marketable securities lending works and determine if this method of borrowing is right for you.

With securities-based lending, financial institutions can use your investment portfolio as collateral, providing you with a credit facility you can use for short-term liquidity needs. To mitigate risk, the borrower must provide collateral (e.g., cash or high-quality securities), and the lender holds the collateral as protection against default.

According to Investopedia¹, “People tend to seek out securities-based loans if they want to make a large business acquisition or if they want to execute large transactions like real estate purchases. Speedy access to cash is often a priority.”

Such loans may also be used to cover tax payments, partnership buy-ins, or unexpected business expenses. Securities-based lending requires proper risk management and regulatory compliance.
 

Advantages

There are several advantages to borrowers with marketable securities lending. For example, keeping your money invested over the long term is usually the best strategy. But when you need access to capital, those long-term investments make it difficult to quickly access your cash. That’s where marketable securities lending is beneficial. By using a securities-based loan, you can retain access to liquidity while allowing your money to remain invested.

Also, if you pull your money out of an investment earlier than expected you can get hit with tax penalties, not to mention the decrease in your overall investment portfolio. By using securities-based lending, you can access liquidity without selling your investments, potentially avoiding these unwanted scenarios.
 

Disadvantages

It’s also important to understand that securities-based lending is not without its disadvantages. For example, most banks will only allow you to borrow 70-80% of the total collateral value and will typically monitor your account on an ongoing basis for compliance. If your portfolio value decreases, you will be required to contribute additional collateral or pay down your loan balance.

As with all loans, borrowing money using securities will require you to pay interest that you would not incur if you liquidated your securities for short-term cash needs. However, depending on your unique situation, the return you achieve by leaving your money invested may outweigh the interest cost.
 

How Can a Banker Help?

A banker can assess your individual income, expenses, and credit profile and help determine the suitability of your investment portfolio for securities-based lending. Bankers can also assist in collateral management, regulatory compliance, and liquidity management, all while utilizing their expertise in financial markets.

While this type of lending can be a valuable tool to help address certain cash needs, securities-based lending is not the answer for all borrowing needs. A trusted banker can provide guidance on how to use these loans effectively, ensuring it aligns with your overall financial strategy and goals.

Securities can be held with American Bank Wealth Management or with another brokerage firm, depending on policy. If you have questions about securities-based lending, reach out to our commercial banking team.