Wealth Insights

SBLOC 101: Guide to securities-based lines of credit

Is a securities-based line of credit right for you? Learn more about the benefits of SBLOCs, potential risks, and factors to consider before borrowing against your portfolio.

Securities-based lines of credit (SBLOCs) have earned a reputation as a quick and tax-friendly funding option among savvy investors. While SBLOCs can offer increased flexibility and lower interest rates compared to many other loan products, there are several factors investors should evaluate before borrowing against their portfolio.

We sat down with Axel Rizo, SVP and Private Wealth Management Leader, to discuss the benefits, considerations and process for obtaining a securities-based line of credit.

For those who may be unfamiliar, what is an SBLOC and how do they work?

Rizo: A securities-based line of credit allows individuals to borrow funds using the assets in their investment portfolio as collateral without having to liquidate the securities. Because clients are borrowing against their own assets, there might not be any fees for this type of loan, and interest rates could be more attractive than a traditional bank loan. Generally speaking, SBLOCs function similarly to a home equity line of credit in that you can draw funds from your line of credit, pay it down, and draw funds again as needed. However, SBLOCs are classified as non-purpose credit under Federal Reserve rules, which means the proceeds are not restricted to a designated use. This structure provides borrowers with broad flexibility in terms of how the funds may be used, subject to the terms of the lending agreement.

Term to Know: Advance Rate

An SBLOC advance rate is the percentage of your pledged portfolio value you can borrow. This typically ranges from 50% to 90%, depending on the types of assets in your portfolio and the amount of risk associated with them.

Why might someone choose to borrow against their portfolio as opposed to liquidating those assets?

Rizo: Securities-based lending allows you to stay invested and not derail your investment strategy. While the pledged assets remain in your portfolio, you may continue to reap the benefits of your holdings in the form of dividends, interest, and potential appreciation. Additionally, this approach allows investors to retain control over the timing of any capital gains. This is particularly helpful if your securities have significantly increased in value since purchase, as selling them outright may trigger a large taxable gain.

An SBLOC is not treated as realizing a gain and is not subject to federal taxes. For investors who want or need cash but would rather avoid selling assets and paying capital gains taxes, an SBLOC could be appealing. Here’s an example of the tax benefits of an SBLOC versus selling assets:

SBLOC vs. Sale of Securities

Note: Loans are subject to advance rates based on investment portfolio asset mix.

You mentioned that SBLOCs offer greater flexibility compared to other types of loans. What can a securities-based line of credit be used for?

Rizo: A securities-based line of credit may be used for a variety of purposes, from consolidating high-interest debt to covering a significant tax bill. They can also be used for business funding and working capital needs — for example, they may be a practical solution for someone who's finding it difficult to obtain startup financing. I have also seen securities-based lines of credit used as bridge financing for real estate transactions, or to acquire property which may not qualify for permanent financing. Some clients also use SBLOCs to fund personal expenses, such as a child's education or wedding, as well as to finance luxury purchases such as a boat or yacht, a personal aircraft, or artwork.

Why consider an SBLOC?

Securities-based lines of credit can provide high-net-worth individuals with a way to access liquidity by leveraging existing assets for new opportunities, while allowing them to maintain their long-term investment strategy.

Bridge financing: Quick access to funds for opportunities (like real estate deals that require a short closing window) before traditional financing is secured.

Business capital: Access to liquidity for new ventures or to support working capital needs of existing businesses that may not meet conventional bank lending criteria due to limited operating/financial history.

Liquidity & tax considerations: Accessing funds through an SBLOC does not involve selling securities, which helps avoid triggering a taxable capital gain.

How does a securities-based line of credit differ from a margin loan?

Rizo: The biggest difference between a securities-based line of credit and a margin loan is that with a margin loan, you're allowed to use the loan proceeds to purchase securities. With an SBLOC, you're not; borrowers are precluded from using the proceeds from an SBLOC to buy securities. Likewise, the funds from a securities-based line of credit cannot be used to repay an existing margin loan.

Can investors borrow against the full value of their portfolio, or is there a limit?

Rizo: There is a limit, and that is defined as the advance rate. Advance rates differ by institution and asset class and are determined by each bank's respective underwriting criteria. While individuals cannot borrow against the full value of their portfolio, the more diversified an investment portfolio is, the higher percentage an institution may be willing to lend against the value of the investment account. Generally speaking, a diversified portfolio typically includes a mix of asset classes such as equities, corporate bonds, U.S. Treasury securities, and/or mutual funds, all of which may be eligible to serve as collateral.

Are there any risks associated with borrowing against your investment portfolio?

Rizo: Yes, there is risk attributed to market volatility, which may immediately impact the investment account's value. If the value of your securities decreases, you must still repay the loan. Keep in mind that SBLOCs typically carry floating interest rates, which means the cost of borrowing will fluctuate as market rates change. If interest rates rise, the expense of maintaining the line of credit will increase accordingly. Anyone contemplating borrowing against the value of their portfolio should consult with their financial advisor or their portfolio manager to better understand the level of risk associated with their respective assets.

And what happens if market volatility causes the securities you've pledged as collateral to decrease in value?

Rizo: If the investment account is impacted by market fluctuations and the collateral value falls below the amount borrowed, it may trigger a margin call. A margin call is an event that needs to be remedied by depositing additional funds in the collateral account or by repaying the loan. If you cannot do this, the securities may be liquidated by the lender without your prior approval. If a margin call is cured in this manner, it may trigger a taxable event. That's something that individuals should be prepared for prior to borrowing against their portfolio.

Are there any guidelines individuals should be mindful of when considering a securities-based line of credit?

Rizo: To not borrow more than you need. Ideally, individuals should work with a wealth advisor or a portfolio manager to understand the different kinds of asset classes in their portfolio and their volatility. Borrowers must also clearly understand the terms of their agreement and the potential financial implications. Likewise, it is recommended that investors perform their due diligence on the firm or institution and understand who will monitor their account in connection to margin calls. That's always very important.

If someone is interested in a securities-based line of credit, what does the borrowing process look like?

Rizo: The process for applying for an SBLOC differs from one institution to another. Ideally, investors should already have an established relationship with a brokerage firm or bank that offers SBLOCs. At Regions, it is customary that the client be assigned to a Private Wealth team. This team typically consists of a wealth advisor, a portfolio manager, a trust advisor, and a lending advisor. A client would consult with a portfolio manager to understand the asset allocation in their investment portfolio. As mentioned, this information is important for investors to know before borrowing against their portfolio. Likewise, this information will also have a bearing on the advance rate, if the client decides to move forward with a securities-based line of credit.

Are there any final takeaways you'd like to share regarding SBLOCs?

Rizo: If someone is considering a securities-based line of credit, they should consider the following:

• A securities-based line of credit can be an effective tool for investors hoping to access liquidity while retaining control over the timing of capital gains.
• As non-purpose loans, SBLOCs give you flexibility and can be used for a variety of purposes, including real estate, business capital, luxury purchases, or as a safety net. Interest payments on an SBLOC could be tax-deductible depending on a few key factors, such as how the proceeds are used. You should consult an accountant or tax advisor for help with your specific situation.
• Before borrowing against your investment portfolio, it's important to have a clear understanding of market volatility together with your investment objective, the types of asset classes in your portfolio, and how those factors may impact your loan.
• Remember that pledging your securities as collateral may increase your level of market risk. Before borrowing against your investment portfolio, you should discuss the benefits and risks with your wealth advisor, wealth strategist or portfolio manager.

Talk to your Regions Wealth Advisor about:

1. Weighing your options for funding business or personal expenses.
2. Tax-efficient strategies for meeting your goals.

Want to get started with wealth planning?
Our wealth management guide can help you take the first step.

Contact a Wealth Advisor to learn more about securities-based lines of credit and explore your borrowing options.

This conversation was edited for length and clarity.

The securities-based line of credit is an extension of credit by Regions Bank and is subject to terms and conditions, fees, documentation requirements, credit approval and underwriting guidelines. Terms of program subject to change. Any interest or other finance charges payable to Regions under the line of credit are in addition to any fees payable to Regions Bank in connection with your account. Amounts owed on the line of credit may exceed investment returns on the account. This is not an offer or contract for any product or service, and it does not replace the legal terms and conditions of the product or service. Please refer to your agreement and related disclosures for the legal terms and conditions that will affect your product or service. Regions Bank does not provide legal or tax advice. Consult your legal and tax advisors regarding the legal and tax implications of borrowing using securities as collateral for a loan. Borrowing using securities as collateral entails risk and may not be appropriate for your needs. For discussion of the risks associated with borrowing using securities as collateral, please review the Loan Disclosure Statement that will be included in your application package. Should the value of securities pledged as collateral decrease below a certain level (as specified within the loan document), the pledge of additional eligible assets and/or liquidation of assets may be required. Securities based Loans shall not be used for certain investment or securities transactions defined in the loan documents.