Ask SmallBiz: Securities Backed Loan
Photo: David Croxford
Q. I own a successful architectural firm in Honolulu. I’d like to expand my business but am having difficulty finding a lender. I have capital assets, including real estate and a portfolio of stocks and bonds, but I’m reluctant to sell in this low market and I’m also concerned about incurring capital gains taxes. What can you suggest?
A. Your company may be an ideal candidate for a securities backed loan. Although not well known, SBLs are simply demand loans using securities like common stocks, bonds, mutual funds and certificates of deposit (CDs) as collateral. These programs are available primarily through large brokerages and “wire houses,” and occasionally through traditional banks.
There are several advantages to SBLs:
• Simple application and fast qualification;
• No application or loan set-up fees;
• Generally, no audited financial statements;
• Lower interest rates based on the London Inter Bank Offering Rate (LIBOR) instead of the prime rate;
• Funds can be used for any purpose except purchasing securities;
• Loan amounts available in excess of $10 million;
• Flexible repayment schedules;
• Interest may be tax deductible; and
• Borrowers can combine their asset values to qualify for lower rates while keeping securities in separate accounts.
There are also some disadvantages to SBLs:
• The collateralized securities must be held at the institution providing the loan;
• IRA, 401(k) and other retirement portfolios cannot be used;
• Potential margin calls or forced sale of securities with market volatility; and
• Relatively high securities portfolio requirement to qualify for preferred rates.
Here is an example of how an SBL might work.
A closely held construction company annually redeems approximately $250,000 of a retired owner’s stock shares for cash, but in the current environment, does not want to use cash or incur capital gains from selling securities. The company has a securities portfolio of $2 million composed of about 30 percent stocks and 70 percent bonds. Given this asset mix they will qualify for an SBL of approximately $1 million with a variable interest rate of 2.5 percent, or a five-year fixed rate of 5.19 percent. Either way, the borrower can pay the retired owner his $250,000
and then make monthly interest payments. Moreover, the interest may be tax deductible as a normal business expense. To put these rates in perspective, the current prime lending rate is 3.25 percent. These interest rates are as of Oct. 1, 2009, and subject to change.
Although SBLs are not for everyone, they can provide a legitimate and potentially lower-cost option to leverage their assets in the current economy.
We have assembled a panel of expertsto help small businesses in Hawaii get answers to pressing questions. Visit hawaiibusiness.com/smallbiz to submit questions or read other submissions.
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