SBLOC Securities Backed Line of Credit | 3 things to know + lenders, rates, and more!
SBLOC Loans | Introduction and Quick Summary
✅ SBLOC stands for a Securities Backed Line of Credit and is a form of securities-based lending.
✅ Many brokerage firms and financial advisors offer this form of lending.
✅ It’s similar to something you may be more familiar with, a Home Equity Line of Credit (HELOC).
✅ Instead of pledging the value of a house you own, like in a HELOC, you pledge the value of your investment portfolio, brokerage accounts, and investment accounts, to secure a line of credit you can borrow against.
✅ You can usually use SBLOCs for anything you like other than purchasing additional securities or trading securities in any way. To do that, you need something similar called a margin loan.
✅ There are many SBLOC lenders available, many with different terms, conditions, and rates. While different institutions call an SBLOC by different terms, popular ones include Fidelity, IBKR, Wells Fargo, and Schwab.
🚨 SBLOCs have specific risks you should consider carefully, like the possibility of getting a margin call. Also sometimes called a maintenance call.
✅ SBLOCs rates tend to be lower than many other forms of borrowing since you are pledging collateral that has a clear, objective value and can easily be liquidated.
Despite the risks, I think everyone with an investment portfolio over $100K should consider having a securities-backed line (SBLOC).
I’m always amazed by how many of my wealthy and high-income friends don’t have an SBLOC set up, and even more amazed by how many have never even heard of one.
Simply put, you pledge your securities as collateral, in this case, stocks, bonds, etc., and in exchange, you get a line of credit.
Let's Talk About SBLOC Risks Upfront (cons)
The amount you can borrow can and does fluctuate daily. The current market value of your securities drives the borrowing limit. If the amount you borrow exceeds the amount the SBLOC allows, you could receive a margin call. In other words, you will need to post additional collateral. If you can’t post additional collateral, your financial institution may begin to liquidate your securities holdings to bring your account into an acceptable level of risk.
Financial institutions that offer SBLOCs know this, of course, so they “haircut” the amount you’re allowed to borrow off of the total actual current value of your account, so that hopefully this does not happen. So even if the market value of the portfolio you’ve pledged is $100K, you might only be allowed to borrow $50K.
The “margin rules” that govern this can get quite complex, but generally speaking, the more volatile and concentrated and less liquid the securities your pledging are, the less you will be allowed to borrow against them.
Concentrated positions, like single stocks, typically face larger haircuts.
So, why should you have an SBLOC? (pros)
Securities based lending (SBLOC) loans are a great way to access liquidity when you need it. It also allows you to create a loan for yourself whenever you need to, without having to wait around for sometimes stubborn and difficult bank approval. Interest rates are often low, especially compared to other types of personal loans, since it’s very clear how much the collateral offered is worth and it can quickly and easily be liquidated.
Oftentimes, you will also be allowed to “capitalize” the interest charged (in other words the interest is just added to the amount that is outstanding). Additionally, as long as the amount outstanding + capitalized interest does not exceed the amount authorized, there are usually no payments required (in other words it’s a revolving line with no required minimum payments). Generally, you will get lower interest rates the more you borrow.
So, with an SBLOC you can give a loan to yourself, for a low-interest rate, and pay it back on your own time. Pretty awesome!
Easy Securities Based Lending Math Example
- Let’s say you have a $20K expense. You’d rather pay $1K/mo for the next 21 months than $20K upfront.
- You also have a brokerage account worth $100K.
- So you set up an SBLOC and your financial institution (or financial advisor) offers you a $50K SBLOC.
- You use $20K of the line, which incurs a 5.0% interest rate. Since you’re borrowing $20K, you will incur $83.33 of interest in the first month ($20K * (5%/12), which is capitalized (added to) the original $20K drawn amount. You make a $1,000 payment at the end of the month, leaving you at $19,083 and so on.
- You end up making a total of $20,926 in payments, meaning you paid $926 in interest expenses.
- [Note for the math nerds: I calculated interest on a monthly basis here. Yes I realize most SBLOC lenders calculate it on a daily basis. The difference is small enough here to be not important.]
So, How Much Can I Borrow from an SBLOC?
Each SBLOC lender or brokerage firm will have their own set of margin rules that determine how much you can borrow. Most are pretty similar, though.
Most lenders will have a minimum initial draw of $75,000, to avoid triggering additional consumer protection regulations and requirements associated with smaller loans.
This usually DOES NOT mean that you have to maintain a minimum balance of $75K, however. So, in theory, you could take out the minimum $75K and payoff the amount you don’t want to use the next day. If your rate was 7% and you only wanted to borrow $5K, you would only pay $9.58 for borrowing the extra $70K for the day. ($70K * (.05/365)).
I’m not aware of any upper limits, the largest SBLOC I dealt with personally was around ~$50M, so if you come up against upper limits you must be doing very well and please let me know what you find out! (Note: smaller lenders might have smaller limits, the above loan was at one of the largest financial institutions in the world). SBLOC rates tend to be lower than other forms of borrowing, since you’re pledging collateral. Typically I see SBLOC rates starting around 7% and going down from there as the line of credit gets bigger.
Many lenders will require some minimum level of activity to keep the line open. Make sure you check for this requirement carefully and keep it in mind. Your interest rate typically goes up the lower your balance, so your rate might increase as you pay it down.
Factors that will generally get you a higher limit
- A well-diversified investment portfolio
- Government securities like treasuries
- Broad-based securities like ETFs
- Higher market cap securities
Factors that will generally lessen your limit
- Stocks / equities
- Low market cap securities (<$1B)
- Single name securities
- Leveraged securities like leveraged ETFs (large haircuts, if it’s counted at all)
What can I use an SBLOC for?
An SBLOC is a non-purpose loan, which means you pledge investment securities as collateral for the loan. In the case of an SBLOC, the type of loan is a revolving line of credit.
SBLOCs can be an important part of your liquidity strategy (an easy way to access cash), especially if you do not have a critical need for the underlying collateral. They can be used for almost anything other than purchasing or trading additional securities.
Some popular uses are:
- Home renovation and other real estate purchases
- Tax payments
- Bridge financing
- In place of a traditional auto loan
- Private business funding
- Capital calls
SBLOCs Tax Deferral Benefit
Using an SBLOC, instead of liquidating securities may also have tax benefits. In the example above, if you had liquidated $20K of holdings subject to the 15% long-term capital gains rate, you would have incurred a $3K tax obligation in order to access your money. Of course, you will still owe that tax at some point, but by using an SBLOC, you’ve deferred that obligation
How are SBLOCs Different Than a Margin Loan?
One great way to have the equivalent of an SBLOC is to simply have a margin account with a brokerage. Oftentimes, this can function very similar to SBLOCs, if you want it to. My brokerage allows me to simply wire out any amount up to my margin loan limit, so I can create a margin loan to myself anytime I like.
The only downside is that they sweep any cash in that account against the balance of the margin loan. This can make keeping track of what’s going on a little more complex, f if you’re using investment accounts for more than one specific purpose each.
In a perfect world, I’d rather have more control and only actively pay down the loan, but this is good enough for most situations as long as I’m willing to pay close attention.
Where can I obtain securities based lending? (or who are the best SBLOC lenders?)
The first thing to know here is that SBLOCs are available from most major brokerage firms and financial advisors. If you are with a large brokerage firm and/or financial advisor you should expect to be able to set one up through them. Some common ones includes Fidelity sbloc (technically a margin loan), IBKR, Wells Fargo, and Schwab.
If your investment portfolio is with a smaller financial institution, they may not offer an SBLOC. Alternately, some smaller financial institutions will offer an SBLOC, but really it’s being underwritten by a larger institution, which may or may not be obvious or transparent to you.
Additional SBLOC Risks TO consider
Interest Rates. Since most SBLOCs are setup as a revolver, lenders protect themselves from rising rates by making the rate floating.
Lack of Portability. If you change financial institutions, your SBLOC will not transfer.
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