What Is Security-Based Lending?

 

Key Points

  • Security-based lending is a sophisticated financing solution that allows you to borrow against your non-retirement investment portfolio without disrupting your long-term investment strategy.

  • There are numerous advantages to leveraging this financial tool including remaining fully invested in the market, tax efficiency, and favorable rates compared to some other debt strategies.

  • Working with experienced advisors who understand both your investment portfolio and your broader financial goals is crucial.

For high-net-worth individuals, there’s a balance between investing your money to build wealth and yet still being able to access those funds in case of an emergency or big expenditure. This is where security-based lending (SBL) comes into play. It’s a sophisticated financing solution that allows you to borrow against your investment portfolio without disrupting your long-term investment strategy.

What Is Security-Based Lending?

Security-based lending enables you to use your non-retirement investment portfolio as collateral for a line of credit. Instead of liquidating assets, which could trigger capital gains taxes or disrupt your investment strategy, you can borrow against your portfolio's value while keeping your investments intact and working for you. 

If you’re looking to expand your business or acquire another business, security-based lending may be an option. Depending on your investment strategy and financial plan, you may opt to borrow to pay for education needs, luxury purchases, or real estate financing. It also gives you the peace of mind to know that your money isn’t completely tied up in case there’s an emergency. You can invest with confidence, knowing your money is accessible should you need it.

The Benefits of Security-Based Lending

Investments  remain fully invested and continue to generate dividends or interest income. From a tax perspective, they’re better than selling because you can defer the capital gains taxes. This can be particularly valuable in high-tax states or during years when you're already facing a significant tax liability. Using your portfolio as collateral also allows you to secure better interest rates than what  you’d otherwise see in an unsecured loan or credit card.  The interest rates are often tied to benchmark rates and can also vary  based on the amount borrowed.

The Risks of Security-Based Lending

While security-based lending offers flexibility, it's essential to understand the associated risks and responsibilities. 

Market Fluctuations: The value of your collateral may decrease, especially  during market downturns. This could potentially trigger a maintenance call, requiring you to either post additional collateral via a cash infusion or repay a portion of the loan via a forced sale of securities while their prices are depressed.

Interest Rate Environment: As many SBL arrangements feature variable rates, changes in the interest rate environment can affect your borrowing costs.

Investment Restrictions: Some securities may not be eligible as collateral, and certain trading activities might be limited while the loan is outstanding.

Is Security-Based Lending Right for You?

Whether or not security-based lending makes sense for you depends on your specific financial situation, goals, and risk tolerance. This is when your financial advisor can recommend your best course of action. Some facts you’ll want to consider include your:

  • Current portfolio composition and diversification

  • Short-term liquidity needs versus long-term investment objectives

  • Comfort level with market volatility

  • Overall debt management strategy

Security-based lending can be a powerful addition to your wealth management when used strategically. However, it requires careful consideration and proper oversight. Working with experienced advisors who understand both your investment portfolio and your broader financial goals is crucial for implementing this strategy effectively.

At Capstone Financial Advisors, we help our clients evaluate whether security-based lending aligns with their comprehensive financial plan. We consider not just the immediate benefits but how this strategy fits into your long-term wealth management objectives and risk management approach.

Disclosures:

This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.

 
Investment PlanningBrian W. Peterson, CFP®Brian Peterson