SECURITIES-BASED LENDING –
A FINANCING ALTERNATIVE
FOR INVESTORS

If you have a portfolio that may be used as collateral for a loan, you may be able to access liquidity without immediately liquidating securities and still maintain your portfolio’s current exposure to the market. This is known as securities-based lending.

What is Securities-Based Lending?

Securities-based lending is generally a revolving line of credit that uses your eligible investment portfolio as collateral. This strategy allows you to access funds without immediately liquidating your portfolio.

In order to establish a securities-based loan, your portfolio is pledged to a lending institution as collateral. This gives you, the investor and the borrower, the ability to access liquidity while maintaining your portfolio’s current exposure to the market. You will continue to receive the benefit of any dividends, interest or capital appreciation that may accrue in the account. However, if you have an outstanding loan balance and the portfolio used to secure that loan declines in value, the lending institution may require you to post additional collateral or repay part or all of the loan. The lending institution may also liquidate all or part of the portfolio, which may interrupt your long-term investment strategy and could result in adverse tax consequences.

For Whom is Securities-Based Lending Appropriate?

A securities-based loan may be an alternative to traditional borrowing for an investor who wants access to borrowing for non-purpose use. Since there is risk involved in this type of strategy, this avenue should be explored only if you are risk tolerant.

What is Non-Purpose Borrowing?

Loans that are provided by lenders, such as banks and brokerage firms, must be classified as either purpose or non-purpose, as directed by the Federal Reserve. The proceeds of a non-purpose loan may not be used to purchase, carry or trade securities. Therefore, a non-purpose securities-based loan is a loan that uses an eligible investment portfolio as collateral for funds for purposes other than purchasing, trading, or carrying securities, or for refinancing other debt used for these purposes. Some uses for a non-purpose loan include:

• Financing real estate opportunities

• Paying taxes

• Refinancing high interest debt

• Financing business opportunities

• Funding higher education

• Buying a luxury item

What Types of Non-Purpose Securities-Based Loans are Typically Available?

The terms and/or types of non-purpose securities-based loans will vary by lending institution; however, in general, these loans are uncommitted, demand facilities with either a fixed interest rate for a period of time or a variable rate. The lender may require repayment of a demand loan at any time, without notice.

For more information about whether securities-based lending may be an appropriate financing solution for you, contact The Baum Consulting Group as well as your legal and tax advisors.

Non-purpose loans may not be used to purchase, trade or carry securities, or to repay debt used to purchase, trade or carry securities owed to the lender.

Neither UBS Financial Services Inc. nor its employees provide legal or tax advice. You should consult your legal and tax advisors regarding the legal and tax implications of borrowing using securities as collateral for a loan. For a full discussion of the risks associated with borrowing using securities as collateral, please review the Loan Disclosure Statement that will be included in your application package. Borrowing using securities as collateral entails risk and may not be appropriate for your needs.

Ahmie E. Baum, CFP® is a Financial Advisor with the Baum Consulting Group of UBS Financial Services, Inc.