This type of lending allows the borrower to use their investments (stocks, mutual funds, bonds or other securities) to obtain funds for personal or business use. Using investments as collateral it is possible to borrow money at low interest rate financing for up to 10 years.
- Fixed interest rates between 2.5% and 4.5%
- Interest Only quarterly loan payments
- Loan terms of 3, 5, 7, or 10 years
- Very low closing costs
- No credit or income verification
- Funds may be used for any purpose including personal or business use
- Non-recourse loan. The only collateral are the pledged securities - not real estate or other personal property
- Loans available for up to 80% of the securities value
- The borrower keeps all dividends and upside market appreciation on the securities
How It Works:
- No principal amortization or loan prepayment
- At the end of the loan term the loan may be renewed, refinanced, or paid off
- At pay off, the exact number of shares initially pledged is returned to the borrower
- Default trigger set at 80% of the loan amount not 80% of the securities value like typical margin loans. For example: securities value of $1MM, loan of $800k, default trigger at $640k (80% of the loan amount). If the securities value fell below $640k the borrower could walk away from the obligation of repayment of the loan and securities and keep the original loan proceeds ($800k) or contribute cash or securities to bring value back to $640k
- The stock must be free-trading without any restrictions and the borrower cannot own more than 10% or more in the company of the issuer
- Retirement funds (401k's, pensions, etc), do not qualify for this program
For a list of frequently asked questions, click here.
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Securities-Based Lending - Frequently Asked Questions
Question: “Is there a restriction on the use of the loan proceeds?”
Answer: A borrower may essentially do anything with the loan proceeds except buy or carry marginable securities with the proceeds.
Q: "Who owns my stock during the loan?" or "Who has title to my stock during the loan?"
A: The stock is transferred to the holding company which has full title, but the borrower retains all beneficial interests in the securities. The borrower will receive any dividends, interest or any other benefits that flow from the stock during the term of the loan.
Q: "If the stock has a dividend during the loan will I receive it?”
A: The borrower receives a credit against the interest payment of all amounts equal to dividends, interest or other distributions on the stock during the term of the loan. Any excess income derived from the security is then applied to the principal balance of the loan.
Q: “Is the transfer of the stock for the loan a sale? Are there taxes associated with the transfer of the stock for the loan?”
A: No, this is not a taxable transfer. This type of transaction is specifically addressed in Internal Revenue Code § 1058 which specifically states that taxpayers who enter into a qualifying stock lending agreement receive non-recognition treatment with respect to any gain or loss at the time of the transfer of the securities. This section provides an exception to the general income recognition principles of Section 1001 of the Internal Revenue Code. This is a common transaction in the financial markets.
Q: “Is the interest I pay deductible like a mortgage?”
A: The answer to this question is entirely dependent on what the borrower does with the loan and how they structure the loan. The borrower will have to consult with their own tax advisor for the final answer. However, there are generally recognized rules which we can share.
I. Interest on ordinary personal debt, like a credit card, is not tax deductible. No deduction is allowed for personal interest.
II. In regard to mortgage interest, this is only deductible if the debt giving rise to the interest is secured by a mortgage on the taxpayer's qualified residence. Since the loan is a non-recourse loan and not secured by a mortgage, the interest does not qualify for the mortgage deduction.
III. A borrower may be able to take a tax deduction for interest paid on a loan to fund business or investment activities; to the extent investment income exceeds investment interest. So, under the Securities Lending Agreement, where the borrower invests the money and pays interest to the lender, the borrower's interest payments could be tax deductible as investment interest. Likewise, interest payments may be tax deductible if the loan proceeds are used for business purposes.
Business or Investment activities could be considered as:
a) interest paid or accrued on indebtedness properly allocable to a trade or business;
b) any investment interest, which generally includes interest paid or accrued on indebtedness properly allocable to property held for investment; and
c) interest taken into account in computing income or loss from a passive investment activity.
The borrower should consult with his or her tax advisor prior to entering into this loan if this is a concern. There are simply too many individual variables and circumstances for us to give any kind of tax advice. This is not tax advice, but only a general discussion of the issues.
Q: “What happens if I default on the loan?”
A: On a non-recourse loan the borrower has no personal liability. The stock is simply forfeited.
Q: Is there any tax consequence should I default on the loan?
A. There are general rules we can share regarding tax treatment of a default. The amount realized is the difference between the loan amount and the cost basis in the stock.
1) Assume the market value of the stock was $100,000 and the loan amount was $50,000.
2) Assume the borrower had a cost basis in the stock of $10,000.
3) The amount subject to tax is the difference between the loan amount $50,000 less the cost basis $10,000. The amount subject to tax is $40,000.
Q: "Am I personally liable for this loan or can the company come after me on this loan if I do not make the payments?"
A: No, this is a "non-recourse" loan; we cannot come after you personally. There is no personal liability associated with this type of loan. The only security for the loan is the stock and the only recourse the lender has is against the stock. The borrower has no personal liability exposure.
Q: “Is this loan reported to the credit bureaus or reporting services?”
A: No, the loan is not reported to the credit bureaus and there is no public record of this loan. Even if the borrower elects to walk away from the loan and default because, for example, he or she has more money than the stock is worth, it is not reported.
Q: “What happens if I fail to make my requited payments on the loan?
A: If the borrower does not make the interest payments when due or fails to repay the principal when due, the lenders only recourse is against the stock. The loan will be terminated and cancelled. The borrower gets to keep the money received for the stock and the lender gets to keep all interest in the stock. The default or termination is not reported to any credit bureaus.
Q: “What if the value of the stock falls significantly? Or “What does this default provision in the loan mean?”
A: If the value of stock falls below the agreed minimum value in the contract, then there is an event of default. The minimum value is 80% of the loan amount.
For example, assume the stock had a full market value of $10 per share when the loan was made. Also, assume the loan terms established a 70% LTV, so the loan was for 70% of the full market value or $7 per share. If the value of the stock falls below 80% of the loan amount, here $7, then there is a default which can be cured by the borrower. In this example, the share price would have to go below $7 x 80%, or $5. 60 per share. For a default to occur, the share price in the example must fall more than 44%.
While the interest rate and interest payment remain constant, due to the volatility of the collateral, the contract may require the borrower to contribute additional cash or shares to keep the loan viable. The decision to tender additional cash or securities is solely in the borrower's hands. The borrower could choose not to risk more capital and terminate the loan or the borrower could choose to keep the loan in good standing by curing the default caused by the loss in value of the collateral.
The additional cash or shares tendered to cure the default do not become part of the collateral for the loan and are not subject to repayment or refund at any time. At origination, the borrower and the lender agreed to a minimum fair market value for the collateral of the loan. The payment of the additional cash or securities establishes a new lower minimum fair market value and higher risk threshold or the lender and borrower alike. Those funds "buy-down" the price of the security to set a new floor for the stock and thus maintain the minimum value ratio between the amount of money loaned and the minimum value of the security for which the lender is willing to be at risk