A Securities Backed Line of Credit

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What is a securities backed line of credit or SBLOC? A securities-backed line of credit is a loan you can take out that uses your investment account as collateral- just like a mortgage uses the actual house as collateral and an auto loan uses the vehicle as collateral.

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It is a revolving line of credit that you can draw on when you need it. You don’t start paying interest until you draw on it, and it is usually interest only and up to you when you pay back the principal.

Many large financial institutions issue SBLOCs and the rate is variable, usually a spread + 1 Mo. Libor. With rates being very low right now, SBLOCs can be found for around 3 + 1 Mo. Libor. One month Libor currently sits around 0.11, so your cost this month would be around 3.11% interest only. Just last year, though, 1 Mo. Libor was around 1.65, so your rate at that time would have been around 4.65%, a pretty large difference. (Libor is going away, but a similar rate substitute is likely to be used.)

Again, interest is due each month. The principal can be paid back in part or in full without penalty when the funds are no longer needed.

Usually, the main thing for which you cannot use an SBLOC is for more investments in publicly traded stocks. This would create undue risk and leverage.

So, why would you want an securities backed line of credit? Having an SBLOC allows you to keep your portfolio invested. Instead of selling securities and transferring cash to your bank account to pay for or invest in something, you access cash via a loan and pay interest on it. This works especially well if the interest you owe is less than what you make in the market with your investments.


Reasons for an SBLOC

  1. It could be used as a backup to your emergency fund. If you ever needed to draw on it, it would be there. If you don’t use it, it’s not costing you anything. In this sense, it’s not a terrible idea to have one set up just in case you needed it.
  2. Maybe you need cash now to buy or build a new house and have not yet sold your current house. A securities backed line of credit can work as a bridge loan.
  3. Maybe you need to finance a home renovation. You should compare an SBLOC rate to a HELOC rate (Home equity line of credit). The SBLOC could be lower and the tax benefits of HELOCs have been reduced due to recent tax laws. Many times, SBLOCs are easier and quicker to arrange.
  4. You might not want to pay capital gains tax. Therefore, instead of selling positions and realizing gains that you would owe taxes on, you pull from the line of credit.
  5. You might want to purchase a rental property.
  6. You might need capital for your new business, or you might need capital to accelerate the growth of your existing business. Many times, start up financing can be easier and quicker through an SBLOC.
  7. You might need capital for an investment in a private business or for a business acquisition.
  8. Maybe you need cash fast for a transaction on something like a boat or artwork. An SBLOC can act as bridge financing, much like #2 above. Having an SBLOC set up ahead of time allows you to act quickly. Of course, you should implement a plan immediately to cover the expenses.

How To Get A Loan

Here at One Bridge, we have a partnership through Commonwealth Financial with Goldman Sachs for securities backed line of credit.

The process is straightforward whereby we send them the investment account statement, they underwrite the loan, inform us of the line of credit amount, which can be up to 70% of the portfolio, depending on the positions. Additionally, a control agreement is signed, whereby you authorize Goldman to sell off positions to cover the loan if they deem it necessary – more on that below.

Once the investment account is collateralized, you have an online portal and login where you can see your line of credit. You can connect it to your bank and enter how much you want to borrow. Within 24 hours, the funds are deposited into your bank account. Each month thereafter you receive a bill for the variable interest owed. You can also set up autopay for the monthly interest. At any time, you can log in and pay back all or part of the principal.


So, What Could Go Wrong And How To Control It:

  1. Interest rates skyrocket, or just go up, and you can’t afford it.
    - How to control it? Have a backup plan to pay back the principal, i.e. sufficient cash!
  2. If rates do rise, what might happen to your investments in a rising rate environment? If a stock price declines below a minimum threshold, or if a bond gets downgraded below investment grade, then the lendable amount might decrease.
    - How to control it? Borrow less than the limit!
  3. A drop in the market! This could result in the lender calling for partial repayment or additional collateral. If you don’t meet the maintenance call within 3 days, then the lender can sell some of your holdings via the control agreement. These sales could trigger capital gains taxes and transaction costs.
    - How to control it? Borrow less than the limit!
  4. Your time horizon for the loan is too long and therefore too expensive. You should compare the total interest expenses over the entire time horizon of the loan.
    - How to control it? Have a plan to pay back the principal!
  5. If you change asset allocation or investments inside your account, then the lending amount could decline. For instance, if you sell treasuries and buy stocks, then the lendable amount would decline because treasuries have a higher lendable amount than stocks.
    - How to control it? Borrow less than the limit!
  6. You don’t have a plan to pay back the principal. This plan is up to you, unlike a mortgage whereby paying back principal is built in. - How to control it? Have a plan to pay back principal!
  7. If you want to withdraw cash from the investment account or if you want to transfer the account, you will have to get permission first from the lender or pay back the loan in full. Lenders can preauthorize the release of dividends and interest paid.
    - How to control it? Borrow less than the limit and have a plan to pay back principal!

A good backup plan, as always, is to have sufficient cash outside of the investment account to cover your short-term needs! You should also have a plan to pay back the principal. Lastly, borrowing less than the limit allows you to have a larger safety net.

Be sure to check out this bulletin and alert from the SEC on securities backed line of credit for more great information! Also check out our post on what is succession planning.

https://www.sec.gov/oiea/investor-alerts-bulletins/sbloc.html*

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