The Benefits of Collateralized Security Loans Over Stock Sales

Collateralized security loans are similar to other loans in that a borrower has a contractual obligation to repay the principal balance of the loan. In view of this, a prospective borrower will likely question if a loan is preferable to simply selling the stock. The reality is that stock loans offer at least five significant benefits over stock sales.

Preferable Capital Gains Tax Treatment. If securities are sold at any price that is above the investor’s basis, that investor may owe substantial capital gains taxes in the fiscal year in which the sale occurs. With a stock loan, no taxes are owed on the cash liquidity that the investor receives at the time that the principal balance of the loan is disbursed.

Retention of Long Term Value Increase. An investor that sells stock loses all opportunity to benefit from share price increases that are the result of underlying fundamental improvements in the stock issuer’s business and operations. With a stock loan, the investor realizes immediate liquidity and, upon repayment of the loan principal balance, the investor reclaims full ownership and control of the collateral stock and all price appreciation of that stock. The stock loan thus acts as a near-term liquidity hedge that the investor can benefit from without any upfront cash outlays.

Faster Access to Capital. Sales of large amounts of a stock can require multiple transactions over a period of several months. The price of that stock can vary dramatically throughout the sale period, creating significant uncertainty in the final amount of capital that the investor will realize. With a stock loan, the lender funds the entire principal balance of the loan, typically in twenty-one days or less after the borrower completes a loan application. The borrower will know the full amount of capital that he or she will receive with no delays or waiting periods.

Privacy: Although, under some circumstances, a borrower may need to report that securities have been used as collateral for a stock loan, in a majority of instances stock loans are private and confidential. Borrowers should always confirm their reporting obligations before closing a stock loan, but where reporting is not required, the borrower can close a stock loan and receive loan proceeds with no knowledge of the transaction being reported or publicized.

Simplicity. A collateralized securities loan application commonly requires an investor to disclose sufficient information to verify the borrower’s identity and to allow the lender to assess the value and liquidity of the proposed collateral. Once the lender has underwritten and approved the loan, the lender will generate a master loan agreement and collateral documents for the borrower to sign. The borrower then converts the stock into electronic format (if the shares are not already recorded electronically) and transfers the collateral to a designated custodian. When the lender verifies that the shares have been properly transferred and that the borrower is in compliance with the terms and conditions of the master loan agreement, the lender disburses the loan as described in that agreement.