Do you have significant assets tied up in stocks? While it’s great to have such assets as part of your portfolio, these are not liquid assets. They cannot be used to meet your more immediate financial obligations, especially if something unexpected comes up. If you need money now and all you have as assets are stocks, you may consider selling off some of your stocks for quick cash. But selling stocks prematurely, rather than letting them appreciate over the long term, can result in significant losses. In order to preserve your portfolio’s long-term viability, we at Infiniti Funding can provide you with a stock-secured loan that gets the cash you need in your hands without reducing the long-term value of your investment while your capital appreciates.
With stock loans, there is no danger of losing money with short-term market fluctuations, either (at least, no more danger than usual) because you don’t cash out your stock. Rather, you use the stock as collateral and avail yourself of the short term loan, then repay the loan per the loan terms when your long-term financial situation improves. Stock loans are a great way to diversify your portfolio, too, shoring up your financial position while your long-term investment continues to appreciate. The securities involved must meet certain daily dollar averages. The staff of Infiniti Funding can discuss these requirements with you. Once you’ve done this, though, you may find that stock loans offer you a very real alternative for getting the cash you need when you need it.
According to RF Global Holdings, “Non-Recourse Stock loans allow the shareholder the ability to access a majority of the current value of the underlying securities position. The shareholder can do this while still retaining access to the securities and having the potential for future growth. Non-Recourse stock loans are one of the most effective and transparent remedies to the global volatility that takes place in the market. Many stock loan clients opt to borrow against a portion of their total share holdings as a hedge against global market downturn. Stock Loans allows the possibility of borrowing against a minority stake of the holdings and use such proceeds into the investment of alternative assets, such as private placement, real estate, new business ventures, etc. This hedging strategy allows the client to keep the upside potential of the security position while unlocking liquidity for alternative investments.”
According to Elizabeth Smith, stock loans are a way to hold on to some of your stocks while still freeing up cash to invest in other areas (or to meet more immediate financial needs). “Investors with stock-heavy portfolios seeking diversification are good candidates for stock loans. Stock loans can allow stockholders to borrow as much as 90 percent of the value of the stock, and they offer a great deal of flexibility. Most have no margin calls, and the money can be used for anything except purchasing more stocks. Stock loans are nonrecourse loans, so the only collateral is the stock itself; the borrower’s credit and possessions are not at stake. The loan works as a built in hedge for the borrower’s stock; if the stock drops, the borrower can simply walk away. Borrowers can use the loans to diversify into other types of investments while maintaining many of the benefits of holding the stock. …Stock loan companies may charge fees in the form of interest and loan origination fees. …Borrowers can make interest payments monthly or allow interest to accrue to maturity, adding to the balance of the loan on a monthly basis…”
Smith goes on, “Borrowers have the freedom to use funds for almost any purpose they wish other than purchasing stocks… Many borrowers use the money to invest in other ways and diversify their portfolios… Borrowers are not selling the stock, so they receive many of the same benefits that they otherwise would…During the course of the loan, most stock loan companies use hedging strategies to protect the stock and its value. The hedging strategy is agreed upon in the loan terms; borrowers are aware of the strategy being used with their stocks. In the safest loans, the company insures the stock position and has a guaranteed buyer for that amount at a specific time in the future.”
Neil Kokemuller of Demand Media explains that the alternative to stock loans, actually selling partial ownership, may not be right for everyone, which is why stock loans become the more attractive idea, “A major advantage of selling partial ownership is you don’t have to take on new debt. Loan financing comes with repayment requirements and an interest rate that leads to finance charges until the loan is repaid. In some cases, you could pay on the loan for years, which means you not only repay what you borrowed, but hundreds or thousands of dollars in fees on top of that. Companies that take on too much debt leverage could eventually face business failure, or even bankruptcy. Another advantage of selling stock to raise funds is that if your business fails, you do not have to pay the money back to investors. You could potentially get sued if you were negligent in your use of the money. However, new investors take on the same risk of loss that you do when you invest in your own business. If you want to minimize your own potential for loss on a new investment, equity financing is the way to go. …A major disadvantage of selling shares of stock to raise funds is that you also give up some level of ownership. Investors buy into your company hoping to profit if the company succeeds and generates profits down the road. Some small business owners seek equity financing without fully contemplating the realities of a new ownership structure. Giving up too much of your company early on to get investments can become frustrating when your profit from your idea and hard work is diminished. Some venture capitalists ask for participating preferred stock. Preferred stock takes precedence over common stock shares owned by founders, which means preferred shares are paid first on a sale of the company. You usually receive less return in this case. …Along with the loss of ownership, you also relinquish some control over your business through equity financing. Some investors insist on having a representative work for the business or become part of your board. The higher the ownership stake, the more control over the direction and decisions of the company the investor usually wants. Spreading out your stock sales to a few investors in limiting shares as much as possible can help reduce your loss of decision-making power over your company.”
Daniel Stafford explains that even non-recourse stock loans have certain pros and cons. “It is common sense that very few well-meaning, legitimate brokers, having built up their reputations and networks of clients through hard work and sacrifice over time, would ever send their clients into these programs if they were aware that the stocks were all being sold to fund the loans and that the lenders had no independent financial resources of their own,” he cautions. “This means that the non recourse lender must disguise, withhold, or outright lie about this aspect of their loan program to both client and broker alike, so that the brokers keep referring clients… In the end, and though it may seem unfair, regulators make only a small distinction between a duped broker and an unscrupulous lender. The former will be fined by the SEC for negligence and possibly accused of participating in a “scheme” even if they were nothing of the sort. Most are actually victims of that very same scheme. …Brokers and markets have a responsibility to thoroughly check out all aspects of their lender, and though sophisticated deceptions…”
According to open-source definitions, when a security is loaned, the title of the security transfers to the borrower. This means that the borrower has the advantages of holding the security, as they become the full legal and beneficial owner of it. Specifically, the borrower will receive all coupon and/or dividend payments, and any other rights such as voting rights. In most cases, these dividends or coupons must be passed back to the lender in the form of what is referred to as a “manufactured dividend.”The initial driver for the securities lending business was to cover settlement failure. If one party fails to deliver stock to you it can mean that you are unable to deliver stock that you have already sold to another party. In order to avoid the costs and penalties that can arise from settlement failure, stock could be borrowed at a fee, and delivered to the second party. When your initial stock finally arrived (or was obtained from another source) lender would receive back the same number of shares in the security they lent. The principal reason for borrowing a security is to cover a short position. As you are obliged to deliver the security, you will have to borrow it. At the end of the agreement you will have to return an equivalent security to the lender. Equivalent in this context means fungible, i.e. the securities have to be completely interchangeable. Compare this with lending a ten euro note. You do not expect exactly the same note back, as any ten euro note will do.
Stock loans are not without their legal pitfalls. According to Reuters, back in 2008 when the credit crunch happened, a number of people were indicted on securities fraud charges stemming from their behavior as “stock loan finders” looking for stocks to cover short sales. “Investigators have found that some stock-loan traders steered millions of dollars of fraudulent finder fees to conspirators, often for no services, in exchange for outright bribes or payments to relatives.”
According to Mark Kolakowski, a financial careers expert, stock loans, also known as securities lending, function within brokerage operations that lend shares of stock (or other types of securities, including bonds) to individual investors (retail clients), professional traders, and money managers to facilitate short sales. “To settle the trade, the short seller must borrow the security in question for delivery to the buyer. Since most of the stock shares held on behalf of brokerage firms for their clients are registered in the name of the firm (known as “street name”), these firms can draw upon this pool of shares to lend out. The interest charged on stock loans normally is the same rate that the firm charges on margin loans. Since the effective cost of funds on the shares thus loaned out is zero, because clients are not paid interest by the firm for depositing their shares with the firm, stock loan departments tend to be extremely profitable. Eventually, the borrower of stock must purchase the shares in question and deliver them to the firm which made the loan, to close it out. In 2012, European securities regulators floated a proposal that would require asset managers to turn over any profits from stock lending activities to investors. Currently, investment funds, like securities brokerage firms, typically keep such profits for themselves and do not distribute them to account holders.”
Chris Pottorff writes, “While holding onto [stocks] until they can be sold, share owners are increasingly considering restricted stock loans. By doing this, they are more apt to take the loan proceeds and use these funds in alternative investments, block purchases, or anything the borrower desires. Though relatively new, restricted stock loans are becoming a popular way of share financing. By themselves, restricted shares of stock cannot guarantee a loan. In the event the debtor should fail to meet the loan obligations, the lender still cannot sell the stock immediately. Hence, prominent lenders must take into account things as the client’s financial situation, projections of cash flow, and what purpose the loan will be used for.”
Let Infiniti Funding help you with your stock loans. We stand ready to tailor a financial solution to your needs. Contact us today for information.