Many wealthy investors and experienced digital participants have seen using the practice known as security-based lending to have ready access to loan capital. These certain investors who engage in big purchases like real-estate or private-owned companies use this particular practice time-to-time. But, that’s practice mostly seen in investors who have a considerable amount of wealth and experience in the market.
What about beginner investors?
Are they familiar with it?
Well, if you are a beginner and have no idea about security-based lending then don’t worry! In fact, that’s why we’re here.
It is a security-based loan collateralized by an investor’s portfolio of eligible securities such as bonds and stocks. Security-Based Lending is totally different from security lending, in which some agency or firm lends securities to traders for short-selling reasons. Whether it is for short-selling stocks, commodities or cryptocurrencies. In SBL, the securities used as collateral to secure loans to investors.
There are certain benefits for the borrower in securities-based lending. One of them is avoiding a taxable event. It prevents the “Need to Sell Securities” from happening. Unlike, second mortgage and home equity line of credit, the SBL has a low rate of interest and has very good payment flexibility. It is known for providing cash in just a couple of days.
Even lender has the advantage in security-based landing where the lender has the facility to additional income stream without much-added risk.
Overall, we can say that security-based lending is a win-win deal for both borrowers and lenders.
Risks Associated With It:
A company who has a reputation for stock-price stability can see its price tumble in future. Nothing lasts forever. Similarly, even the goody-goody security-based lending has some certain risks associated with it.
The security-based lending (SBL) influenced by the volatility in the stock market and fixed-income market.
Think about it in this way!
When stock market performs poorly, which by the way happens in time-to-time, the market value of many assets hits the levels which you never thought of. An investor who depends on it may face some difficulties in backing the loan unless he/she has some surplus liquidity outside of the securities or if the loan is backed by the assets such as treasury bills.
Another potential risk in the security-based loan is if the lender doesn’t agree with a specific security as collateral. In this case, a large block of stocks of a big reputation company can go waste if the lender decided that it would no longer accept as collateral. The result, either you will sell that block of stocks and invest something that was acceptable for the lender’s collateral needs.
Final Thoughts: –
No doubt, the security-based lending has its own benefits like repayment flexibility, low-interest rates, and among others. But, it has some risks as well. So, whenever you plan to use this practice, don’t forget to consider your options and review your assets which you are planning to use as collateral in backing the loan.
If you have any doubts or would like to share your views then don’t forget to mention in the comment section below. We will be happy to answer all your questions.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.