SBLOC. A line of credit secured by your shares — how will it help you earn?

Every person who has at least once been interested in how loans work has heard about such a method as a credit line. A credit line is a lending method in which you receive a loan with a predetermined limit and the possibility of automatically prolonging the contract and repaying the loan on any day when the contract is valid. But in this article, we will talk about special credit lines SBLOC (Securities-Backed Lines of Credit) available to firms trading in securities and ordinary investors. SBLOC is a beneficial source of additional profit. Especially in stable market returns and growing investment portfolios, investors may feel more comfortable using their assets. A line of credit secured by your shares — how will it help you earn?

A line of credit secured by your shares — how will it help you earn?What is SBLOC?

SBLOCs are loans often given to investors as an easy way to raise additional cash by borrowing against the assets in an investment portfolio without selling the securities. You may continue to trade, buy and sell securities in your pledged accounts up to a predetermined amount. Of course, you cannot sell all your shares and withdraw money from the account, making the line of credit unsecured.

In this agreement, the lender requires you to pay only monthly interest, and the line of credit remains open until you repay it. You can pay off some (or all) of the outstanding principal at any time and then re-borrow later. Some investors like the flexibility of SBLOC compared to a term loan, which has a predetermined term and a fixed repayment schedule. In addition, the ability to pledge securities to earn income from them is a grand scheme if you know how to work with your debts and build assets using “other people’s money.” You get free money.

But as always, the devil is in the details.

How does SBLOC work?

Many companies offer the opportunity to get SBLOC:

• brokerage or consulting firms
• clearing firms (the firm that holds your securities and other assets such as cash in your account)
• third party lenders such as a bank

You and the lender enter into an SBLOC contract to get a loan. The contract specifies the maximum amount you can borrow. And you, in turn, agree to use the assets of your investment account as collateral. Suppose the value of your securities declines to an amount that is no longer sufficient to support your line of credit. In that case, you will receive a “maintenance call” notifying you that you must fund your account to continue securing the account or repay the loan within a specified period (usually 2 or 3 days). If you can’t do either, the lender can sell your securities and keep them to meet the contract’s requirements. It’s possible to accomplish this either entirely or partially.

At the same time, the tax consequences of such an action are entirely up to you – at the end of the year, you will be required to pay taxes on such a sale and possibly move to a new tax bracket with higher taxes on your primary income. Therefore, this strategy requires detailed work with your tax and financial advisors before implementation.

SBLOCs are non-purpose loans, meaning you cannot use the proceeds to buy or trade securities, but you can use them for everything else. In this way, this agreement differs from your broker’s margin lending, where funds can usually only be spent on trading shares.

What about the credit limit?

A typical SBLOC agreement allows you to borrow from 50% to 95% of the value of the assets in your investment account. To qualify for SBLOC, firms often require that the market value of your portfolio assets and your initial SBLOC deposit meet specific minimum requirements. It is not uncommon for a lender to demand the market value of your assets to be $100k or more to be eligible for the SBLOC program.

What can be collateral for such a loan?

Generally, securities that can act as collateral for SBLOC include stocks, bonds, and shares in mutual funds. The maximum credit limit for SBLOC generally depends on the amount of funds and the type of underlying collateral in your account. The lender’s analysts determine it by assigning a value to eligible securities. Thus, each asset has a corresponding valuation. Not many people know, but for this, bank analysts assess companies on the market and issue reports.

Typical credit limits range from 50% to 65% of the total portfolio value for equities, from 65% to 80% for corporate bonds, and up to 95% of the portfolio value for US Treasuries.

Now it becomes clear why people buy US Treasuries — instead of a savings account that brings nothing and buying risky shares — you can put all the unnecessary cash in a brokerage account and instantly pull up to 95% out of it, when you need to invest in anything, such as an attractive real estate deal.

Interest rates and repayment

Interest rates for SBLOC are often lower than you would expect with a personal loan and even more so credit card interest.

Most SBLOC lenders may choose not to check your credit score before issuing an SBLOC by determining your maximum limit based solely on the value of your portfolio. This can be useful for those people who have low credit scores.

A line of credit secured by your shares — how will it help you earn?Conclusion

SBLOC seems attractive to access additional capital when the markets show positive returns. But general volatility can increase your potential losses, putting your financial future at greater risk.

If you want to free up additional funds and are ready to understand the details of this case, you can try. But, if you plan to receive a predictable and guaranteed income, we recommend you look closely at real estate investments with LBС Capital. Sign up for a consultation to discover investment opportunities together! Those who invest in real estate earn real income and our team of experts is ready to prove it to you!