Borrowing Against Your Portfolio: When It Makes Sense
As wealth grows, financial decisions often become more complex. For many investors, most wealth is invested rather than held in cash, creating liquidity challenges when funds are quickly needed.
Whether funding a home renovation, purchasing real estate, pursuing a business opportunity or addressing a short-term liquidity need, many investors assume they need to sell investments to access cash.
In some situations, that may be the right answer. In others, borrowing against a portfolio through a securities-based line of credit (SBLOC) may help preserve the integrity of a long-term financial plan while providing the liquidity needed today.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
An experienced adviser, guided by a thoughtful and carefully constructed financial plan, can help determine when an SBLOC may make sense, when it may not and how to use it effectively while keeping the broader financial plan intact.
How an SBLOC works
Many affluent investors have substantial assets but limited readily available cash. When a significant expense or opportunity arises, selling investments may generate capital gains taxes, disrupt asset allocation or reduce exposure to future market growth.
An SBLOC allows investors to borrow against eligible assets in their investment portfolio without selling the underlying securities.
As a revolving line of credit, it provides flexible access to cash while allowing investments to remain part of a long-term strategy.
Because the loan is secured by investments, borrowing terms may differ from unsecured lending options.
SBLOCs are often used to address short-term liquidity needs, fund major purchases or serve as a source of readily available borrowing capacity. As a non-purpose loan, proceeds can be used for many personal or business needs, but typically can’t be used to purchase, carry or trade securities.
The amount available to borrow depends on the type and value of the assets pledged as collateral, which are typically held in eligible taxable investment accounts rather than retirement accounts.
When borrowing against your portfolio might make sense
Securities-based lending is not a one-size-fits-all solution, but it can be an effective planning tool in several scenarios:
Bridging a short-term liquidity need. A common use case is when an investor needs cash today but expects funds in the near future.
For example, someone might be awaiting proceeds from the sale of a business or property, an annual bonus or another expected source of funds. Rather than selling investments, SBLOCs could provide temporary financing until those funds arrive.
Funding major purchases or opportunities. Real estate purchases, business investments or other large expenditures may arise when market conditions are favorable. In these situations, an SBLOC may provide flexibility and speed while allowing the investor to keep their investments intact.
Securities-based lending is commonly used for purposes such as real estate financing, business financing, tax obligations, education expenses and other significant purchases.
Avoiding unnecessary liquidation. Selling investments to raise cash can disrupt a long-term strategy and create unintended tax or market consequences. Beyond potential taxes, investors may find themselves out of the market during periods of strong performance.
An SBLOC may help maintain exposure to long-term growth opportunities while addressing immediate cash needs.
When borrowing against your portfolio may not make sense
Securities-based lending can be a valuable tool, but it’s not appropriate for every situation.
Long-term spending needs. Using borrowed funds for ongoing lifestyle expenses warrants careful consideration. An SBLOC may be more effective as a source of strategic, temporary liquidity than as a permanent solution to recurring cash-flow challenges.
For long-term spending needs, selling assets or pursuing other financing options may be more appropriate.
When market volatility would create discomfort. Borrowing capacity is tied to the value of the pledged investments. If the value of pledged securities declines, the lender may require additional collateral or repayment of a portion of the loan.
If those requirements are not met, the lender may sell pledged securities, potentially on short notice and without advance consultation regarding which assets are sold. Investors who are uncomfortable with those possibilities may prefer other sources of financing.
When rising borrowing costs could be a concern. While SBLOCs can offer competitive borrowing rates, they typically feature variable interest rates and may involve interest-only payments.
As interest rates change, borrowing costs can increase, potentially affecting cash flow and the overall cost of financing. Investors should understand how rate fluctuations could affect their repayment strategy before establishing an SBLOC.
When repayment is unclear. As with any borrowing strategy, there should be a clear understanding of how the debt will be managed and repaid. An SBLOC should be evaluated within the context of a comprehensive financial plan, not simply because borrowing capacity exists.
Why professional guidance matters
Effective use of securities-based lending often involves guidance from banking, lending and wealth management professionals who understand the client’s broader financial picture.
An adviser can help evaluate questions such as:
- Is borrowing more advantageous than selling securities?
- What are the potential tax considerations?
- How does the loan affect overall cash flow?
- How might different market scenarios affect the pledged portfolio?
- Does the strategy support long-term financial goals?
An SBLOC is more than a lending solution. It’s a financial planning decision that should be evaluated within the context of an investor’s broader goals.
Accessing cash doesn’t always require selling investments. For some investors, an SBLOC can provide liquidity while preserving a long-term investment strategy.
But as with any financial tool, it should be used intentionally, with a clear understanding of both its benefits and its risks.
When incorporated into a comprehensive wealth strategy and guided by experienced advisers, borrowing against a portfolio may help investors pursue today’s opportunities without losing sight of tomorrow’s goals.
