A securities-based line of credit offers access to cash without scrambling your asset allocation.
We’ve all heard it before. Sock away at least six months’ cash in a rainy day fund that can be quickly and easily accessed. This can help you cover expenses you don’t see coming or capitalize on opportunities that knock. It helps to have a handy source of liquidity for unexpected repairs, for example.
But even if you have emergency savings, there might be times you’ll want to avoid draining your cash reserves for a sudden cost. In those cases, your first instinct might be to liquidate your investments. This can prove to be a tricky path, however. If the market’s doing well, you’ll raise cash yet rack up a capital gains tax bill. If the market’s down, selling will likely lead to a loss.
Fortunately, there is another option: a securities-based line of credit, or SBL.
As opposed to liquidating your assets or emptying your rainy day fund, an SBL is backed by your portfolio. This can allow you to access cash quickly without disrupting your asset allocation and while staying invested in the market. Think of it as an emergency fund. One less centered on having cash on hand and more on having access to cash when you need it.
Since an SBL uses your taxable brokerage account as collateral for your line of credit, you usually have the flexibility of choosing how much to borrow. The repayment process is often flexible as well. You’ll just want to ensure you maintain the required collateral amount in your account.
Once you open an SBL, you can typically withdraw funds within a few days. But even if you don’t need the funds immediately, having an SBL can be a prudent backup plan that helps provide you with additional confidence.
While an SBL can offer increased flexibility over how much to borrow and how to pay it back, keep in mind that you might have to meet specific criteria to open one. For instance, some brokerage firms may require you to have a certain account balance and then calculate the credit available to you based on eligible securities in your account. In addition, you won’t be given a dollar-for-dollar loan due to market volatility.
Another point worth noting: The amount of assets you hold at a firm often affects the interest you’ll get. Usually, the more assets, the lower your rate. That’s why an SBL can be ideal for larger account balances. That said, SBL rates aren’t fixed. So it’s best to strike when the iron’s hot and rates are low.
As with any borrowing option, it’s crucial to be mindful with an SBL. Use your credit line sparingly, back it with less volatile securities and set up an actionable repayment plan. And remember you can’t use an SBL to purchase other securities or pay off margin loans.
You might not consider an emergency home repair or travel plans – either of which could be covered by an SBL – topics for your advisor. But that’s not the case. Your advisor is there to help you through all the emotional and financial challenges, as well as opportunities, along life’s journey. That includes the impromptu ones.
If you’ve already begun planning for surprise financial situations, you’re likely off to a good start. If not, don’t wait any longer. The goal is to be prepared, not panicked, when you experience the unexpected.
A securities-based line of credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities toward an SBLC. Borrowing on securities-based lending products and using securities as collateral may involve a high degree of risk, including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the pledged account(s) may be sold to meet the collateral call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a collateral call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a collateral call. Increased interest rates could also affect LIBOR rates (or any successor rate thereto) that apply to your SBLC, causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s non-pledged Capital Access account. Securities-based line of credit provided by Raymond James Bank. Raymond James & Associates, Inc., and Raymond James Financial Services, Inc., are affiliated with Raymond James Bank, a Florida-chartered bank.