Goldwyn Capital
A securities-based line of credit, or SBLOC (also called a securities-backed line of credit), is a revolving credit line secured by the investments in your brokerage account. Brokerage firms offer them, often through a bank affiliate, and so do banks. You pay interest monthly, usually at a variable rate, you can’t use the money to buy securities, and if your account falls in value the lender can ask for more collateral or sell your holdings.
For a diversified account of large, liquid holdings, an SBLOC is often the simplest of the ways to borrow against your shares. When most of your net worth is one small cap, microcap or OTC stock, a non-recourse stock loan may fit better.
How does a securities-based line of credit work?
You sign an agreement that sets the most you can borrow and pledge your investment account as collateral. From there, FINRA explains, you make monthly interest-only payments, the loan stays outstanding until you repay it, and you can repay some or all of it at any time and borrow again. You can keep trading in the pledged account.
The rate usually follows a benchmark such as prime or SOFR, plus a spread. Interest is calculated daily, the rate can change every day, and interest is usually charged monthly. Some firms offer a fixed rate.
What can you use an SBLOC for?
SBLOCs are non-purpose loans, which, FINRA says, means you can’t use the proceeds to buy or trade securities. Almost anything else is allowed. The joint FINRA and SEC investor alert gives home renovations, real estate, travel, a new business, education costs and an unexpected tax bill as examples.
A bank lending you more than $100,000 against exchange-listed stock must, under the Federal Reserve’s Regulation U, have you sign a purpose statement on Form FR U-1.
Which portfolios qualify for an SBLOC?
In general, FINRA says, eligible collateral includes stocks, bonds and mutual funds held in fully paid-for cash accounts. A typical agreement lets you borrow 50 to 95% of the account’s value, depending on the size of your holdings and the types of assets in it.
The joint alert, published in 2015, gave typical advance rates of 50 to 65% for equities, 65 to 80% for corporate bonds and 95% for US Treasuries. FINRA’s 2024 guide leaves those figures out and says credit limits vary by firm, so ask yours for its current schedule.
Neither guide says which individual stocks a firm will take. Each firm decides, and FINRA warns that the decision can change: a firm can drop a security from its eligible list, cut your credit limit to match and ask for more assets if what remains doesn’t cover the balance.
What happens if your investments fall?
If your securities fall too far to support the line, you get a maintenance call: post more collateral or pay down the loan within a set period, typically two or three days. If you can’t, the firm can sell your securities and keep the cash. FINRA adds that lenders often can make those decisions without notice, and that you could owe capital gains tax on what they sell.
SBLOCs are also classified as demand loans, so the lender may call the loan at any time, whether or not the market has moved.
An SBLOC is a loan you have agreed to repay, and neither the FINRA guide nor the SEC alert describes it as non-recourse. Ask the lender whether you would owe any balance left after it sells your securities.
Can you get an SBLOC against a concentrated stock position?
That is each firm’s call, and it is where an SBLOC fits least well. FINRA warns that 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,” and you might be forced to sell at the bottom of the market. The joint alert suggests borrowing less than the maximum offered.
Thinly traded stock adds a second problem. In a 2013 letter to firms about margin lending, FINRA said that when thinly traded equities make up a concentrated position, the quoted price “may not be representative of the liquidation value of the security,” and told firms to decide carefully whether, and how much, to lend on less liquid positions. If a broker has already refused you margin, why your broker won’t lend against your penny stock explains the rules behind it.
How does a non-recourse stock loan compare?
The lender Goldwyn Capital works with, an independent US family office making non-recourse stock loans since 2006, looks at the stock you pledge. It typically needs to trade around 100,000 shares a day or more, the shares must be free trading, eligible for resale under Rule 144, or registered, and the lender can take up to 4.99% of a company’s outstanding shares.
You transfer the shares to the lender’s custody account for the life of the loan and receive 30 to 50% of their market value, from $50K to $5MM. Interest is 5 to 7% a year, simple, fixed and paid quarterly, with any fees listed on the term sheet. The term is three years, repayable from month 24 with a penalty before that. The shares are the only thing securing the loan, and there is no credit check or 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. Our guide to how a non-recourse stock loan works goes through each step.
| Securities-based line of credit | Non-recourse stock loan | |
|---|---|---|
| Who lends | Your brokerage or advisory firm, a clearing firm or a bank | An independent US family office |
| Collateral | Generally stocks, bonds and mutual funds; eligibility varies by firm | Free trading, Rule 144 eligible or registered shares, typically trading 100,000+ a day |
| Where the securities sit | In your pledged account | In the lender’s custody account until you repay |
| How much | Typically 50 to 95% of account value | 30 to 50% of the shares’ value, $50K to $5MM |
| Interest | Usually variable, charged monthly | 5 to 7% simple, fixed, paid quarterly |
| Term | Open until you repay, but callable at any time | Three years, repayable from month 24 |
| If the collateral falls | Maintenance call, typically 2 or 3 days | Equity call at a 25% fall, 5 to 10 business days |
| If you don’t meet the call | The firm can sell your securities | The loan closes and you owe nothing further |
When is an SBLOC the better choice?
If your firm offers one and your account holds a spread of large, liquid stocks, bonds or funds, an SBLOC is likely simpler and more flexible. You draw only what you need, repay whenever you like and keep trading, and depending on what you hold you may borrow a larger share of the value than a stock loan’s 30 to 50%. It also suits short or uncertain needs better than a three-year term. Compare the rate you are quoted, and how far it could move, with a fixed 5 to 7%.
A non-recourse stock loan is built for the other case: most of your wealth is in one stock, often a small cap, microcap or OTC name, your firm will lend little or nothing against it, or you want to know in advance exactly what happens if it falls.
A worked example
Say you hold $2,000,000 of one Nasdaq small cap that trades about 300,000 shares a day, all free trading, plus a $400,000 account of large listed stocks and mutual funds. The numbers are hypothetical.
For $150,000 of school fees, an SBLOC on the $400,000 account is the natural route. At the 2015 alert’s typical 50 to 65% for equities it would support roughly $200,000 to $260,000, if your firm’s rates were in that range, and a $150,000 draw stays well under the limit, as FINRA suggests.
For an $800,000 house, that account can’t carry the loan, but the small cap might. If the lender approves it and your shares are within the 4.99% ceiling, 40% of $2,000,000 is $800,000, and 6% simple interest is $48,000 a year, paid as $12,000 a quarter.
What to check before you sign
For an SBLOC, ask the firm who the lender is and who tells you about a shortfall, which holdings are eligible and at what rate, how long you get to meet a call, and whether you would owe a balance after a forced sale.
For the stock loan:
- Your shares leave your account. They sit in the lender’s custody account, title can transfer, and they are returned when you repay. You benefit from a rise in the stock when you repay, on the terms written into your term sheet.
- 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.
- Some insider trading policies restrict pledging, so officers and directors should check theirs before using company stock for either loan. Our checklist for officers and directors covers registration and Form 4.
Common questions
Can you use an SBLOC to buy stocks?
No. FINRA describes SBLOCs as non-purpose loans, so the proceeds can’t be used to purchase or trade securities. Borrowing from your broker to buy stock is what the SEC calls margin; our comparison of a stock loan and a margin loan shows how margin behaves when prices fall.
What is the minimum for an SBLOC?
FINRA says it is not uncommon for a firm to require at least $100,000 of assets, and firms often set a minimum first draw too. The exact figures vary by firm.
Do you need good credit for an SBLOC?
Not always. FINRA notes that some SBLOC lenders might not run a credit check and might set your limit from the value of your portfolio alone. Practices vary by firm.
Can you move your account to another firm with an SBLOC open?
Not easily. FINRA says pledged assets are harder to move, and you will likely have to pay off the loan first.
Will an SBLOC accept microcap or OTC stock?
The FINRA and SEC guidance on SBLOCs doesn’t name eligible stocks. Each firm decides what it accepts and at what advance rate, and can change that later, so ask about your specific position and get the answer in writing. If the firm says no, or offers too little to matter, a non-recourse stock loan is one alternative.
