From Editor: This is a guest article from Jay Dombroski, Marketing Director of BHP Markets, Bahamas Have you heard of a stock loan but you aren’t quite sure what it is and how it works? Are you curious about leveraging your securities portfolio while retaining ownership and growth potential? Read on to learn more about stock loans and which product is right for you. A stock loan, or a securities based loan, is a liquidity vehicle provided by private institutions and banks. The Lender requires the borrower to deliver shares to serve as collateral for the loan. As long as the strength of the security and the minimum size of the loan is acceptable, the borrower will qualify for a loan. There are a number of reasons to apply for a loan, as we will discuss below. There are also many pitfalls to avoid when shopping for a loan.
What is a stock loan?
As mentioned previously, a stock loan is a source of liquidity for borrowers in possession of securities. The typical stock loan is non-recourse in structure, meaning if you have to default on the loan, it will not be reported to any credit agency and you won’t owe the Lender anything beyond the collateral.
The following are key factors for a loan. First is what is called a LTV, or Loan to Value. This is what the lender is willing to lend on your securities. Next is the interest rate of your loan. Thirdly, you and the lender will agree to the period of the loan. Finally, there are fees related to the origination and structuring of the loan.
Who is eligible for a securities based loan?
For the most part, anyone that can meet the minimum loan size of the lending institution is eligible for a loan. For the most part, you must not be a US citizen, or seeking to leverage a security(ies) based in the United States. The securities must also be free trading and, of course, you must own the securities.
As with any financial transaction, make sure to do your homework on the company you choose as your Lender. A few red flags to look for are:
– No phone number on the website. – No principal/owner information – No experience in the financial industry Make sure to always ask for references. Another easy way to learn more about your Lender is Google. Search for the name of your lender and include the search term lawsuit, or fraud, etc. Stock loans can serve as a smart way to ‘stay in the market’ while providing immediate liquidity. Make sure you do your due diligence and don’t be scared to ask for a better deal.
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