Goldwyn Capital
You can get cash from stock without selling it on the open market by borrowing against it. The three main ways are a margin loan from your broker, a securities-based line of credit (often arranged through a bank), and a non-recourse stock loan from a specialist lender. All three use the shares as security, and each one treats you differently if the price falls.
Selling part of the position and borrowing against something else you own are the other two routes. If most of your net worth is in one company’s stock, the choice usually turns on whether a lender will accept it and what happens to you if it drops.
Why not just sell some of the shares?
Selling is the simplest route, since there is no loan to service or repay. For someone with a large position in one company, a few things tend to get in the way.
If you believe the stock is going higher, selling now hands that rise to the buyer.
A large sale can also cost you on price. FINRA notes that “executing a large order quickly in a low-volume security can be difficult,” and that you might have to accept a lower price if you need to sell quickly. The SEC’s guide to microcap stocks says that because many trade in low volumes, “any size of trade can have a large percentage impact on the price of the stock.”
Officers and directors have more to work around. If your company’s insider trading policy uses trading windows, you can only sell while one is open. An affiliate selling under Rule 144 is limited in any three months to the greater of 1% of the shares outstanding or, for exchange-listed stock, the average weekly trading volume over the four weeks before the Form 144 notice. In most cases the sale goes on a Form 4 within two business days, public on the SEC’s EDGAR database. And a Rule 10b5-1 trading plan comes with a cooling-off period of 90 to 120 days for directors and officers before the first trade. Our checklist for borrowing against company stock as an officer or director covers the rest.
None of this makes selling the wrong choice. If the stock trades heavily, you are not an insider and you are ready to part with the shares, selling part of the position may be the cleanest answer.
How does a margin loan work?
A margin loan is credit from your broker, secured by the securities in your account. Under the Federal Reserve’s Regulation T, the required margin on a stock that qualifies as a margin security is 50% of its current market value, so a broker can generally lend up to about half its value. If the stock falls far enough, you will generally get a margin call. The SEC’s investor education office warns that a broker may sell your securities without consulting you first and that you can lose more money than you have invested.
For a concentrated position, the harder part can be getting the loan at all. FINRA says a firm may restrict margin on stocks that don’t trade on a national exchange and on stocks it considers prone to large daily price swings, and can raise its house requirements at any time without advance written notice. Why your broker won’t lend against your penny stock explains the rules.
How does a securities-based line of credit work?
FINRA describes an SBLOC as a revolving line of credit secured by the securities in your investment accounts. You pay interest only, monthly, usually at a floating rate, and the money can’t be used to buy or trade securities. If the collateral falls, you typically have two or three days to post more or repay, or the firm can sell your securities, and because SBLOCs are demand loans, the lender can call the loan at any time.
FINRA’s warning fits a single large holding exactly: if your portfolio is concentrated in one stock or sector, “a single market event could cause your portfolio value to plummet and trigger a maintenance call.” Our securities-based line of credit vs stock loan comparison goes further.
How does a non-recourse stock loan work?
Goldwyn Capital introduces shareholders to an independent US family office that has made non-recourse stock loans since 2006. You transfer the shares to the lender’s custody account for the life of the loan, and title can transfer. The lender wires you 30 to 50% of their market value, more for heavily traded stocks, for a loan from $50K to $5MM (what decides the amount). Interest is 5 to 7% a year, simple, fixed for the term and paid quarterly, with any fees listed on the term sheet. The term is three years, and you can repay from month 24, with a penalty before that. When you repay, the shares are returned, and if the stock has risen, you benefit on the terms written into your term sheet.
There is no credit check and no personal guarantee. If the stock falls 25% below the level the loan closed at, you get 5 to 10 business days to top up with cash, stock or other securities. If you choose not to, the loan closes: you keep the cash, the lender keeps the shares, and you owe nothing further.
The stock typically needs to trade around 100,000 shares a day or more, and the shares must be free trading, eligible for resale under Rule 144, or registered. The lender can take up to 4.99% of a company’s outstanding shares.
Can you borrow against something else instead?
A home equity line of credit leaves the stock alone and puts the house behind the loan. The Consumer Financial Protection Bureau notes that HELOCs usually carry a variable rate, that a lender might stop further borrowing if the home’s value falls significantly, and that if you fall behind or can’t repay on schedule, you could lose your home.
If you also hold a diversified portfolio, you could pledge that for a margin loan or credit line and leave the concentrated stock out of it.
Comparing the options
| Where the shares go | If the stock falls | Watch for | |
|---|---|---|---|
| Sell part of the position | To the buyer, for good | No loan, so no call | A large order can move a thinly traded stock; insider rules |
| Margin loan | Stay in your brokerage account as collateral | Margin call; the broker can sell without asking | Little or no loan value for stock that trades only over the counter |
| Securities-based line of credit | Stay in your investment account, pledged | Maintenance call, typically two or three days | Usually a floating rate; the lender can call the loan at any time |
| Non-recourse stock loan | To the lender’s custody account until you repay | Equity call at 25% below the closing level; 5 to 10 business days | The shares leave your account; repayment from month 24 |
| Home equity line of credit | They stay where they are | The loan is unaffected | Your home secures the loan |
A worked example with round numbers
Say you founded a company that now has 50,000,000 shares outstanding. You own 1,000,000 of them, the stock is at $2.00 and trades about 150,000 shares a day, so your position is worth $2,000,000. You need $600,000 within the month to buy a house. These figures are hypothetical.
Selling would mean 300,000 shares, two full days of the stock’s average volume. As an officer or director, you would also have to work within your company’s trading policy, and the sale would go on a Form 4.
With a non-recourse loan, say the lender offers 40%. You pledge 750,000 shares, worth $1,500,000 and 1.5% of the company, and receive $600,000. At 6% simple interest you pay $36,000 a year, or $9,000 a quarter. If the stock fell to $1.50, 25% below where the loan closed, you would have 5 to 10 business days to top up. If you chose not to, you would keep the $600,000 and owe nothing further, and the lender would keep the 750,000 shares.
What to check before you choose
- For a margin loan or credit line, read the agreement for the maintenance requirement, how much notice you get before a sale, and whether the lender can change those terms.
- For a non-recourse stock loan, the shares leave your account and title can transfer until you repay, so check the lender before you sign.
- If you are an officer or director, check whether your insider trading policy restricts pledging. For the non-recourse loan, officers and directors need shares registered for resale, and Section 16 filers should expect to report the loan on Form 4, so confirm both with your company’s counsel.
- Depending on how the loan is structured and where you live, transferring shares to a lender can be a reportable tax event, so talk to a tax adviser before signing. Goldwyn Capital does not give tax advice.
Common questions
Can I borrow against my stock instead of selling it?
Yes, if a lender will accept the stock. A margin loan on a qualifying stock generally tops out at about half its value, FINRA says a typical SBLOC agreement allows 50 to 95% of the account’s value depending on the assets, and a non-recourse stock loan pays 30 to 50% of the shares’ market value. Our overview of loans against stock covers each type in more depth.
Do I still own the shares while I borrow against them?
That depends on the loan. With a margin loan or SBLOC, the securities stay in your account, pledged as collateral. With a non-recourse stock loan, the shares move to the lender’s custody account for the life of the loan and title can transfer. They are returned when you repay.
What happens if the stock drops after I borrow?
With margin, a fall can bring a margin call, and the broker may sell without contacting you. With an SBLOC, you typically get two or three days to meet a maintenance call. With the non-recourse loan above, a 25% fall below the closing level brings an equity call with 5 to 10 business days to respond, and if you choose not to top up, you owe nothing further.
How quickly can I get cash from my stock?
Most US stock sales settle one business day after the trade, though a large block in a thinly traded stock can take longer to sell. FINRA says SBLOC funds may be available within a week of signing. For the non-recourse loan described here, indicative terms come back within one business day of a request and the loan funds in 7 to 10 business days.
