Securities-based lending is a strategic approach to availing cash flow at slashed costs. The ultimate catch to this approach is that you remain invested with your securities, retaining the ownership right and yet leverage it to fulfil your cash flow needs.
Among surmounting benefits that securities-based lending offers, instant access to capital, cut-off interest rates, and repayment flexibilities are the greatest ones.
Understanding Securities-Based Lending
Being debt-free is not a luxury for every business or personal situation. There are instances where leveraging debt is indeed the right thing to do than using personal assets.
That being said, securities-based lending is borrowing money off collaterals such as stocks, bonds, mutual funds, ETFs, i.e. securities. You can put the amount you loan to any use, such as buying real estate, cars, home renovation, or just about any other asset.
Why would you want to loan your securities and not sell them?
Selling securities to meet your cash flow needs works in this fashion – sell the securities, pay taxes on any gains incurred or incur losses, and use the remaining amount as liquid needs.
Borrowing funds using securities as collateral does not include paying taxes or revoking ownership. This means you can continue to hold your investment strategies and portfolio and continue to borrow additional funds for cash flow management. Is this all?
Accommodates flexibility – Tiny cash-based financial requirements or large obligations, securities-based borrowing can accommodate any kind of asset requirement. Hence, it offers a great deal of flexibility.
Reduces tax implications – You spare yourself the realisation taxes, which you would have to otherwise pay while selling securities. Better structure slashes tax obligations to a great extent.
Cost-effective – Charges such as set up fees or high-interest rates are cut off, making this form of borrowing an attractive and cost-effective option.
Retained ownership rights – Keeping it short, you get to retain your portfolio and investment strategy, which you can, in the long term, realise for bigger gains.
Note: you can use securities-based lending to buy any asset besides other securities. This is the only limitation there is for this form of lending.
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Is Security Based Lending a Good Idea?
Borrowing money is a sign of indebtedness on a common note. Wonder how smart and big-time investors perceive debt? They leverage debt, like the ones obtained from securities-based lending, to avoid realising capital gains and likewise taxes. This is a common lending notion even small investors can follow to efficiently and rather quickly manage cash flow objectives.
Here are some reasons why you should leverage securities-based lending without hesitation.
Buy securities with confidence
If you find a nice investment opportunity with a lockup period you do not want to commit to, you can still invest. If you require the invested amount anytime within the lockup period, you can use securities-based lending to meet your requirement and later sell the securities for a higher profit, which would compensate for the SBL interest.
If not, you can always sell your securities in favourable market circumstances and enjoy the gains.
Choose higher interest rate investments
FDs are the standard options investors choose when they want to secure a lump sum amount for a year or two. The interest rate of which is pretty low. With the perks of SBL, you can, with no worries, invest in securities that would enhance your portfolio.
In this case, you would make more money than the interest FDs fetch. Better yet, you can hold the securities till they are priced to fetch you gains and meanwhile use SBL for immediate cash requirements.
Meet your financial obligations
Any financial gaps that you may find, starting right from buying a home to fulfilling personal obligations, SBL helps you meet all your financial goals.
Manages your tax burden
Tax management is easy with SBL. Say you need some funds for emergency use, but selling all your securities would need you to pay a high tax margin on the gains. The tax bracket would, however, not apply if you diversify the gains among two financial years.
You can choose to sell half of your securities and borrow the other half amount using the remaining securities you have. This way, you would be able to look after your emergency needs, post which you can sell the other half of your investments and repay the loan. Paying a minute interest is better than paying heavy interest rates.
How to Avail of Securities-Based Lending?
If ever you wish to avail yourself of SBL, you may do so through your stockbroker or banks. Connect with the broker that has your investment and ask for the service. In case of interest rates conflicts, you can always change accounts and investments with a broker that offers you a better rate.
This service is a possibility for a bunch of banks if not all. You can connect with your bank and enquire about the provision. IRAs or other accounts with tax advantages are not allowed for this facility, which you need to cross-check with your broker or banker.
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Risk and Disadvantages Of Securities-Based Lending
While you know the perks of securities-based lending, here is when they might sound unattractive.
- Market fluctuation and uncertainty trigger borrowers’ confidence. Any market crash or bad performance compels borrowers to cash the securities at losses. Forced selling or liquidation is one of the reasons users refrain from using securities-based lending.
- In case the value of your holdings falls below the loan amount, you would be forced to park in more securities.
- Non-payment of interest would lead to securities seizure. The securities are then sold and realised to repay your loan amount.
- Some portfolio perks are held until you repay your entire loan amount.
- Interest rates for such securities are not fixed but rather floating. The interest amount you are due to pay may change every other month.
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Investors are unaware of the market risks that come with parking securities for cash or investment. Equally, weigh in the requisites and disadvantages of availing SBL. Strategy borrowing, however, is profitable in cases such as high taxable accounts, high-interest rates, and more.
Done right, securities-based lending gives you a cost-saving advantage.
Stay updated with Finezza’s blogs and spaces to know if SBL is the right call for you.
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