A securities-based line of credit (SBLOC) allows you to borrow money using your investment portfolio as collateral. It provides liquidity without requiring you to sell your stocks, bonds, or other securities, which can help you avoid capital gains taxes or selling investments you intend on holding for longer. This article explains how SBLOCs work, their benefits and risks, and when they might be a suitable option for you.
- SBLOC = securities-based line of credit
- LOC = line of credit
1. What is a Securities-Based Line of Credit (SBLOC)?
An SBLOC is a revolving line of credit secured by your investment portfolio (a mortgage is secured to your home as a SBLOC is secured to your investments). Instead of liquidating investments to access cash, you borrow against their value. You continue to own your securities, and they remain invested in the market.
- Collateral: Stocks, bonds, ETFs, and other eligible securities.
- Usage: Funds can be used for nearly any purpose except buying more securities.
- Repayment: Typically interest-only monthly payments.
2. How SBLOCs Work
- Collateralized Loan: Your investment portfolio acts as collateral.
- Loan Amount: Determined by a Loan-to-Value (LTV) ratio, usually between 50% and 95% of your portfolio value. This is typically determined based on the overall risk of the investment and the total % of your account allocated to that investment (for example, concentrated stock positions have lower LTV ratios because of the single stock risk).
- Maintenance Call: If the value of your portfolio drops significantly, the lender may issue a maintenance call, requiring you to either add more collateral or repay part of the loan.
- Interest Payments: You pay only interest monthly, with the principal repaid when the line is closed. The principal can be reduced with payments before the line is closed, but it is not required.
- Revolving Credit: You can borrow, repay, and borrow again—similar to a credit card. They can be open for extended periods of time with no borrowing.
Example:
If you have a portfolio worth $1 million and the lender offers an LTV of 65%, you can access up to $650,000 as a line of credit.
3. Eligibility Criteria
- Portfolio Minimum: Typically $100,000 or more in eligible securities.
- Account Structure: Accounts have to be nonqualified assets. SBLOC can not be used with retirement accounts.
- Approved Securities: Stocks, bonds, ETFs, and mutual funds are common.
- Lender Requirements: Vary by institution and may include restrictions on asset types or concentration. They may also require a certain minimum loan amount.
4. Interest Rates and Fees
- Rates: Usually tied to benchmark rates (e.g., SOFR) plus a stated % or "spread". These are variable rates and can increase or decrease.
- Lower Than Personal Loans: Often more competitive due to the secured nature of the loan.
- Fees: Some lenders may charge maintenance or origination fees.
5. Common Uses for SBLOC Funds
Permitted Uses:
- Real estate purchases - Investment properties, primary homes, lake/beach properties
- Business expenses - A float for lower cash flow months or to purchase a new business
- Education costs
- Personal expenses (e.g., travel, weddings)
The primary use we often recommend for clients is utilizing this to purchase an income-producing asset (i.e., a business or a rental property). This allows them to start to receive cash flow, which can assist with paying down the LOC.
Prohibited Uses:
- Buying additional securities
- Paying down margin loans
6. Benefits of an SBLOC
- Liquidity Without Selling Assets: Avoid disrupting your investment strategy or triggering capital gains taxes. We often see these strategies used when the client has a large stock position with a very low-cost basis. They can have liquidity associated with that asset without having to liquidate the position and pay taxes.
- Lower Interest Rates: Often cheaper than unsecured personal loans.
- Flexibility: Borrow funds as needed and repay on your schedule.
- Continued Investment Growth: Your securities remain in the market. This is key. Selling investments and using lump sums for certain purchases can disrupt your financial plan for the rest of your life.
7. Risks and Considerations
- Market Volatility: A market downturn can trigger a maintenance call.
- Loss of Securities: Failure to meet a maintenance call may result in the forced sale of your securities.
- Variable Interest Rates: Rates may increase if benchmark rates rise.
- Tax Implications: While you avoid immediate capital gains taxes, interest payments are not always tax-deductible.
8. How to Apply for an SBLOC
- Choose a Lender: Banks, brokerage firms, and financial institutions offer SBLOCs. (for example, we partner with
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- Application Process: Submit financial statements and investment account details.
- Approval: Based on portfolio value, asset mix, and risk assessment.
- Funding: Once approved, funds are typically available within days. These can be transferred to your account via Wires.
10. Is an SBLOC Right for You?
An SBLOC can be a powerful financial tool if:
- You need quick access to liquidity.
- You want to avoid liquidating investments and incurring capital gains taxes.
- You’re confident in your portfolio's stability.
However, it’s essential to understand the risks, including potential margin calls and market fluctuations.
A securities-based line of credit (SBLOC) can be an effective tool for accessing liquidity without selling your investments or triggering capital gains taxes. It offers flexibility, competitive interest rates, and the potential to keep your portfolio invested for long-term growth.
However, SBLOCs carry risks, especially during market downturns, which can lead to maintenance calls or forced sales of your assets. They’re best suited for individuals with a stable, well-diversified portfolio and a clear plan for repayment.
Before proceeding, consult with your financial professional to ensure an SBLOC fits your overall financial strategy and risk tolerance.
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Securities and advisory services offered through LPL Financial, a registered investment Advisor, Member FINRA/SIPC. This does not represent tax or legal advise, please consult your tax or legal professional.
