Using securities-based lending to fund business growth
Invest in your business without disrupting your investments.
As a business owner, you’re always exploring how best to run, manage and grow your organization. But that doesn’t mean you have to liquidate your personal assets to finance your business needs.
Securities-based lending allows investors to use their portfolio as collateral to secure a loan. For business owners, this offers access to liquidity without having to sell investments, which is particularly advantageous in avoiding disruption to your long-term investment strategy.
Securities-based lines of credit (SBLs) offer flexibility in more ways than one
SBLs are a flexible alternative to traditional financing, offering quick access to capital which may be crucial for taking advantage of timely business opportunities or protecting your company from unexpected expenses.
An SBL can be used for a variety of business liquidity needs, including:
- Accessing more working capital
- Replacing an existing business line of credit at a higher rate
- Purchasing or constructing a commercial property
- Hiring and training new staff
- Increasing inventory
- Expanding product lines to diversify offerings
- Purchasing equipment or technology upgrades
- Investing in R&D and innovation
- Investing in or acquiring a new business
- Buying out a business partner
- Paying a large tax bill
- For unexpected expenses
Why fuel business growth with a SBL?
Structures, fees and set-up times vary between individual situations and lenders, but most SBLs combine the benefits of competitive interest rates, flexible borrowing structures and the ability for businesses to access liquidity quickly.
In addition, SBLs offer:
Fast access to funds
Acquiring approval for SBL loans is typically quicker and requires less documentation than many traditional financing options. A streamlined underwriting and application process means you can get cash when you need it – typically within a matter of days.
No fees and low rates
SBLs don’t have upfront set-up fees, maintenance charges or closing and cancellation costs. They also typically offer business owners lower interest rates compared to personal loans or credit cards.
Flexible repayment options
Another benefit is the high degree of flexibility SBL loans offer in their repayment terms. From early repayment options and having no fixed repayment schedules, to adjustable loan amounts and interest-only payments, SBLs are a versatile alternative to traditional financing.
How SBLs work
Initiating an SBL application involves providing details about your investment portfolio (which will act as collateral to secure the loan). The lender determines the value of your securities, which in turn helps identify the loan amount you can access. Securities pledged can be either personal or business assets.
Depending on the types of securities and their volatility, the loan amount offered is typically presented as a percentage of your portfolio’s value – often between 50% and 90%.
Lenders will continuously monitor the value of your securities throughout the repayment period. Once the loan is repaid in full, your securities will be released back to you.
The potential risks
Like any financial instrument, securities-based lending comes with potential risks. These risks may include:
Constraints over control of securities
Since securities are used as collateral, they can only be sold in the open market once the loan is fully repaid. This limitation can restrict borrowers in their ability to react quickly to market changes.
High concentration, low diversification
If diversification isn’t properly considered, and the collateral is instead concentrated in a small selection of securities, the borrower faces greater risk tied to the performance of those particular assets.
Market volatility
The value of securities used as collateral can fluctuate as a result of market conditions. If the value of securities drops significantly (for example, below 50% of the closing day loan value), this may trigger a market call, potentially forcing the borrower to provide additional collateral to avoid securities being sold to cover the loan.
Business credit consequences
Taking out a loan can impact a business’s credit score. Applying for a loan requires lenders to perform a hard inquiry on the borrower’s credit report. Missing payments or defaulting on a loan can also damage a business’ credit score, potentially making it harder for borrowers to secure financing in the future.
Finding the right use for your business
Leveraging loans isn’t the right move for every business owner. Just because SBLs are often fast and inexpensive to acquire doesn’t imply you need them.
A valuable place to start is by evaluating the problem you’re trying to solve or the opportunity you’re trying to pursue. After that, explore your options to identify whether you can inject cash into your business in way that offers more benefits in the long term than SBLs.
To determine if SBLs are suitable for your business, it’s important to carefully assess the terms, risks and potential impact on your business’ financial picture. If you need liquidity and flexibility while maintaining ownership of your investment portfolio, an SBL could be a valuable tool to consider.
A line of credit backed by securities, such as a securities-based line of credit or a structured line of credit, may not be suitable for all clients. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the pledged account(s) may be sold to meet the collateral call, and the firm may sell the client’s securities without contacting them. A client may not be entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a collateral call. In many cases, the firm may increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client may not be entitled to an extension of time on a collateral call. Increased market interest rates could also affect the applicable rate index that applies to your line of credit causing the cost of the credit line to increase significantly. The interest rates charged are determined in part by (i) the market value of pledged assets and the net value of the client’s non-pledged Capital Access account or (ii) the line of credit amount as outlined in the Loan Agreement. Lines of credit are provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, member FDIC.
The proceeds from a line of credit backed by securities cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account (with the exception of advances made into the pledged account solely for the purpose of sending out or effecting an international wire within 1 business day of receiving funds from the bank); (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards a line of credit.
Lending solutions are offered through Raymond James Bank, an affiliate of Raymond James & Associates, Inc., and Raymond James Financial Services, Inc. Raymond James & Associates, Inc., Raymond James Financial Services, Inc., and your Raymond James Financial Advisor do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be put into contact with a Raymond James Bank employee for your residential mortgage needs.
Raymond James does not offer tax advice. Please consult your tax advisor for questions regarding your tax situation.
Products, terms, and conditions subject to change. Subject to standard credit criteria.
The line of credit can be suspended, reduced or terminated in the event of fraud, failure to repay, adverse collateral conditions or other reasons as outlined in the credit agreement. Please refer to the credit agreement for all terms.
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