What is Securities-Backed Lending?
Securities-backed lending is the practice of using marketable securities or other financial instruments as collateral for a loan. In essence, you pledge your liquid securities (equities, bonds, investment funds and other types of securities as well as commodities) in exchange for a loan, these securities are used as collateral. Securities-backed lending allows you to increase your liquidity or access capital without having to sell your securities.
Having credit available to you when you need it is one of the many benefits of securities-backed lending. Securities-backed lending is known for being flexible and the process is quick and straight forward and does not require credit checks. Capital can be used at the client’s discretion for a variety of different uses. It’s for these reasons (amongst others!) securities-backed lending is a popular and highly regarded borrowing mechanism.
How Does Securities-Backed Lending Work?
Securities-backed lending isn’t actually that different from ‘standard’ consumer loans in terms of how they work. The main difference is that securities are used as collateral, rather than other types of assets, nor is it based on your income or earning power, which is often the case with consumer loans.
Let’s say you own shares with a market value of €10 million in a listed company. You need access to capital, but you don’t want to sell your shares, which wouldn’t be advantageous to you for any number of reasons. Instead of selling your shares to create the liquidity you need, you can benefit from a securities-backed loan, using your shares as collateral. You can get a securities-backed loan for around 50% of the value of your shares - an amount of approximately €5 million.
What Are the Advantages of Securities-Backed Lending?
Securities-backed lending can be very advantageous for a number of reasons. Underwriting is often limited to the collateral used as security for the loan, which means the process is quick and highly efficient. In part, it’s this very efficient underwriting process that makes securities-backed lending so popular: you can create liquidity fast and relatively easily.
Selling securities or underlying assets can have an impact on your broader financial situation, creating significant tax charges, for example. Alternatively, if you have to sell securities early or before the ideal moment to create liquidity, you may also miss out on the future upsides of the asset as it grows or crystallise a loss, meaning selling isn’t in your best interests. For these reasons, you may not want to sell your securities to raise funds and may want to look at other options, of which securities-backed lending is likely to be one.
Securities-backed lending provides an efficient and flexible alternative to selling your securities. You maintain the long-term benefits of securities ownership without incurring some of the unwanted financial repercussions of selling securities, all while accessing the capital you need. Securities-backed lending can be ideal if you want to respond to an unexpected opportunity but don’t have the capital you need available in cash. You may also want to consider these types of loans if you encounter an issue or opportunity that you need to solve or pursue.