Unlocking liquidity: Understanding a securities-backed line of credit (SBLOC)
A securities-backed line of credit gives you access to capital without having to liquidate your investments. Discover how this credit solution works, its key benefits and what it takes to qualify.
Jon Kircher, Senior Vice President & Capital Advisor
Sometimes liquidity needs arise – whether planned or unexpected – and your first instinct may be to tap into your cash reserves or investment portfolio.
However, liquidating your investments could come at a cost in the form of having to pay capital gains taxes, potentially compromising your portfolio’s growth opportunities. There is an option to consider: a securities-backed line of credit (SBLOC). This financial solution allows you to conveniently and cost-effectively access liquidity without upending your wealth management plans.
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What is a securities-backed line of credit?
Let’s say you’re looking to fund a new business endeavor or need to pay a tax bill promptly. With a securities-backed line of credit (SBLOC), you can access cash quickly by leveraging your portfolio as collateral. This may include stocks, bonds, mutual funds or exchange-traded funds (ETFs). An SBLOC provides a secure line of credit while preserving your market exposure.
Simply put, you can borrow against what you own and make interest-only payments while using the principal. It’s similar to a home equity line of credit, where a homeowner accesses cash using the equity in their property to secure a loan.
Key benefits of SBLOC
What makes a securities-backed line of credit attractive compared to traditional loans is its ability to provide liquidity without depleting your investments. Additional SBLOC benefits include:
Preserve your investment strategy
Maintain your asset allocation and long-term financial goals without having to sell off holdings.
Avoid a tax payment
When you draw on your SBLOC, you’re not taxed. This could be a tax saver especially since the capital gains tax can be as high as 23.6% for some individuals.
Quick origination process
From application to booking, this option may be more favorable than other borrowing options that require extensive underwriting.
Financial flexibility
Access funds quickly and use the money for a variety of purposes – business investments, tax payments, real estate purchases or unplanned expenses.
No upfront costs
Typically, SBLOCs come with no application fees, loan origination fees, annual charges or early repayment penalties.
Competitive interest rates
Interest rates on a securities-backed line of credit may be more favorable than other borrowing options.
Flexible repayment terms
Most SBLOCs offer interest-only payments with no fixed maturity date, giving you control over how and when you make repayments.
How does a securities-backed line of credit work?
An SBLOC is ideal for individuals and businesses needing short-term liquidity while maintaining their investment strategy. For example:
- A business owner might use a securities-backed line of credit to manage cash flow, fund acquisitions or cover operational expenses.
- A high-net-worth individual (HNWI) may use an SBLOC to finance a real estate purchase, pay taxes or support philanthropy initiatives.
To qualify, a bank or brokerage firm may require a minimum portfolio balance, with the maximum credit available based on the value and type of assets in your portfolio. Due to market volatility, you won’t receive a dollar-for-dollar loan. Instead, you may be able to borrow between 50% and 95% of your portfolio’s value.
What are SBLOC rates?
The more assets you hold, the lower your interest rate may be – making SBLOCs especially appealing to those with larger account balances. Rates are generally structured as either:
- Variable interest rates often follow the Secured Overnight Financing Rate (SOFR).
- Fixed interest rates are based on the amount and type of assets in your portfolio.
Understanding the risks of securities-backed line of credit
While an SBLOC offers financial flexibility and convenience, it’s important to understand the potential risks:
Market volatility
Since your line of credit is secured by your investment portfolio, market fluctuations may cause the value of your assets to decline. This type of movement could trigger a maintenance call – also known as a margin call – requiring you to deposit additional funds or liquidate your assets to keep the loan.
Asset eligibility
Not all assets may qualify as collateral. Illiquid or volatile investments may be excluded, which could limit your borrowing capacity.
Overleveraged trading
Borrowing against your investments can be tempting, but excessive use may strain your financial position, especially if your repayment is delayed or if interest rates go up.
Have questions? Huntington Wealth Management can work with you to determine if a securities-backed line of credit fits your goals and risk tolerance. Get started today.
Huntington is here to help
At Huntington, we offer a securities-backed line of credit solution, known as Investment Secured Lending (ISL), which is designed to help you unlock liquidity without interrupting your investment strategy. Whether you’re planning for a major purchase or simply want added financial flexibility, your wealth advisor can help you determine if a securities-backed line of credit fits your goals.
Contact your Huntington team or find a location near you to learn how we can help you turn your investment portfolio into a resource for funding new opportunities.
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