Goldwyn Capital
If you hold a meaningful position in a public company, there are two common ways to borrow against it without selling: a margin loan from your broker, or a non-recourse stock loan from a specialist lender.
On a good day they look alike. Both put cash in your account and both leave you exposed to the stock. The difference shows up when the price falls.
How a margin loan works
A margin loan is a credit line inside your brokerage account. Your shares stay in the account and the broker lends you a percentage of their value, usually at a variable rate.
The catch is the maintenance requirement. If the stock drops and the equity in your account falls below the broker’s minimum, you get a margin call. The broker can sell your shares to cover it, often without waiting for you, at whatever price the market offers that day. If the sale doesn’t cover the debt, you owe the difference.
On concentrated or volatile positions, brokers often set stricter requirements, so calls come sooner. And many won’t accept small cap, microcap or OTC stock as collateral at all.
How a non-recourse stock loan works
With a non-recourse loan, you transfer the shares to the lender’s custody account and the lender wires you a percentage of their value, typically 30 to 50% for small and microcap stocks. You pay simple interest at a fixed rate, usually quarterly. At the end of the term you repay the loan and your shares are returned.
Non-recourse means the shares are the only thing securing the loan. There is no personal guarantee and no credit check, so the lender has no claim on anything else you own.
The same bad day, two outcomes
Say you hold $1,000,000 of stock and borrow $400,000 against it. Then the stock falls hard.
With a margin loan, a big enough drop triggers a margin call. You either post more cash or the broker sells shares at the market price. If the position ends up worth less than the loan, the shortfall is a debt you still owe.
With a non-recourse stock loan, a 25% fall below the level the loan closed at triggers an equity call. You get 5 to 10 business days to top the position back up with cash, stock or other securities. If you choose not to, the loan is terminated: you keep the $400,000, the lender keeps the shares, and you owe nothing further.
Your downside is limited to the shares you pledged and the interest you have already paid. Your home, your savings and your credit stay out of it.
Side by side
| Margin loan | Non-recourse stock loan | |
|---|---|---|
| Where your shares sit | In your brokerage account | With the lender, for the life of the loan |
| Interest | Usually variable | Simple and fixed, typically 5 to 7% |
| Small cap and OTC stock | Often not accepted | Accepted |
| If the stock drops | Margin call, possible forced sale | 5 to 10 business days to top up |
| If it falls below the loan | You owe the shortfall | You owe nothing more |
The trade-offs
A non-recourse loan comes with trade-offs too, and you should know them before you sign:
- Your shares leave your account. They sit with the lender for the life of the loan and come back when you repay.
- Tax can apply. Depending on the structure and where you live, transferring shares to a lender can be a reportable tax event. Talk to your tax adviser first.
- Upside terms are set in the term sheet. You benefit from a rise in the stock when you repay, on the terms written into your term sheet.
- Early repayment has a window. Most loans can be repaid from month 24, with a penalty before that.
- Insiders have filings. Officers and directors need shares registered for resale, and Section 16 filers should expect to report the loan on Form 4.
Which one fits
If you hold a large, heavily traded stock at a broker that accepts it as collateral, a margin loan can be simpler: you keep the shares in your own account and repay whenever you like.
If your stock is a small cap, microcap or OTC name, if you hold it outside the US, or if you never want to face a forced sale or a personal debt, a non-recourse loan is built for exactly that situation.
