In today's world, having access to cash is an essential part of any financial plan. It gives you the freedom and flexibility to make the most of opportunities that come your way while also potentially providing a safety net for when the unexpected crops up. The thing with cash is that you can deploy it instantly—if you have it. But many of us have chosen to invest our excess funds in building our wealth. While that may be one way to prepare for the future, it doesn't leave you with much liquidity when cash needs arise in the now.
The good news? A relatively easy way to get quick access to cash is through a type of portfolio financing called a securities-backed line of credit or SBLOC. An SBLOC allows you to take a line of credit against your nonretirement investment portfolio. A portion of your stocks, bonds, ETFs, or other assets are put into a separate account, and in exchange, you get a line of credit. You can use your credit line for almost anything except to buy other securities or repay margin loans. The best part is an SBLOC doesn't impact your underlying investments — they continue to grow and appreciate.
SBLOCs are incredibly versatile and can be used for many purposes. The following are some of the most popular ways investors use securities-backed lines of credit to provide the liquidity they need.
1. Create a Financial Safety Net for You and Your Family
Life is unpredictable. You don't always know what's coming next. You might find yourself with a much higher tax bill than expected or medical bills for an emergency room visit you certainly didn't anticipate. Perhaps you were laid off unexpectedly, leaving you with a significant income shortfall. Situations like these can throw a serious wrench in your plans, especially if you don't have substantial cash savings, can easily tap into your funds, or are tied up in investments.
An SBLOC provides emergency access to cash. You might consider applying for an SBLOC even if you don't have an immediate need. That way, you're more prepared for whatever comes your way — removing one layer of stress and giving you peace of mind that you have a financial safety net.
2. All Things Home: Real Estate Bridge Loans
Buying real estate or building a new home can be stressful. Whether you're a first-time buyer or a seasoned investor, you might feel excited, nervous, or anxious. Rightly so — it's a big investment that typically requires significant money. While mortgage loans are usually the way for first-time buyers, having cash for a healthy down payment can reduce the interest you'll pay throughout your mortgage. However, remember that borrowing from an SBLOC to fund a down payment only makes sense if the interest rates are lower.
If you need funds to buy one home while waiting to sell another, an SBLOC can provide the financing you need in the short term while waiting to secure better long-term financing options. When building a new home, SBLOCS often offer more flexibility than construction loans, usually short-term, high-interest loans for one year. With an SBLOC, you may be able to secure more favorable interest rates than other lenders provide.
Home renovations or other large projects (think installing a home theatre or extensive landscaping) require a significant capital outlay. Covering the costs through an SBLOC might be an attractive option, especially compared to home equity loans and lines of credit that often come with higher interest rates. Plus, SBLOCs are simpler to set up, and you have access to cash to pay for materials and contractors on your timeline in a matter of days
3. Personal Borrowing to Fund Dreams and Support Big Life Events
We all dream about what we'd like our lives to look like — whether that's how we spend our time, the environment in which we live, or the purchases we enjoy. Many dreams require financial health to make them a reality, but we don't always have excess cash to fund the big stuff. Maybe you want to take a river cruise through Europe or experience an African safari while your health is good. Or perhaps you've been dreaming of your first-ever luxury camper van so you can hit the road and explore America. Whatever your dream, it likely requires a financial commitment. That's where an SBLOC can support you, giving you the freedom and flexibility to enjoy life now while your investments continue to grow and appreciate your future dreams.
An SBLOC also allows individuals who need to borrow money for significant life events such as a wedding or a child's tuition to easily cover these types of expenses. Again, having a line credit available makes it easy to plan for and cover more considerable costs. An SBLOC also gives you control over the interest because you only borrow against the line of credit when you need the cash.
4. Starting or Growing a Business
If you're a business owner (or want to be), it's pretty likely that at some point, you'll find yourself in the position of needing cash to cover short-term capital expenses. You cannot always control business expenses, especially if you rely heavily on vendors or smooth-functioning supply chains.
In other instances, you may want to seize an opportunity to invest further in your business or expand your footprint. Funding these opportunities often requires a laborious borrowing process. Or, if you need seed money for a startup you've been dreaming about, you may find that startup financing can sometimes be challenging. An SBLOC gives you access to either start or grows your business without a ton of hoops to jump through or difficult financing conditions.
5. Alternative to Cashing in a Portion of Your Investment Portfolio
When liquidity needs arise, people sometimes turn to their investment portfolios to gain access to cash. However, selling any portion of your investments means you will be responsible for capital gains taxes, which could be a significant sum depending on how much you pull out of your account. Even more important to consider is that when you sell, you reduce the value of your portfolio — which in turn reduces your potential long-term returns.
This decision could also throw the financial plan you've worked so hard to establish entirely off track, leaving you with less future income than you had planned. This is where an SBLOC can serve as an alternative to cashing in your portfolio. It gives you quick access to the cash you need while leaving the value of your portfolio intact and in a position to potentially take advantage of future growth opportunities.
6. Strategically Manage Your Debt
A variety of lenders typically hold the average household's debt (e.g., credit cards, auto loans, mortgages) with terms likewise all over the board. SBLOCs often come with competitive interest rates, so it could make sense to consolidate or pay off high APR debt with your securities-backed line of credit, helping you realize savings through better terms on your debt.
Plus, repayment terms are often flexible — meaning if you pay the interest monthly, you can pay back the principal as you like during the term.
Is Securities-Based Lending Right for You?
SBLOCs are versatile and flexible options that can be used for various purposes—interested in finding out more about how an SBLOC could potentially augment your financial plan? We know making big financial decisions can sometimes feel overwhelming, but we're here to help you navigate the world of SBLOCs. We'll weigh the risks and advantages to figure out how you can prepare for the unexpected, take advantage of personal and professional opportunities that arise, and fund your dreams — all while preserving the wealth you've worked so hard to build and keep your financial plan on track.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
There are risks associated with establishing an SBLOC, including the potential impact of a market downturn, the potential tax implications if pledged securities are liquidated, and the potential impact of an increase in interest rates.
The issuing bank owns the right to take exclusive control over the account and liquidate securities if needed in the event of a collateral shortfall.
Credit decisions, including initial underwriting, are the sole responsibility of the bank issuing the collateral loan, and not LPL Financial.