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How borrowing against a brokerage account can be a cash source in a pinch

A securities-based line of credit isn't for everyone, but it can be a quick source of cash for investors who don't want to tap an emergency fund.

NerdWallet
August 21, 2021 at 1:00PM
Some investors can use their brokerage account to obtain cash quickly in a pinch. But as with all loans, there are risks. (File image/The Minnesota Star Tribune)

Life happens. At some point, you might need quick cash for a down payment or to cover an unexpected expense, but may not be sure whether it warrants raiding your emergency savings.

You could sell some of your investments, but depending upon the market, it might not be the best time to take profits.

But there's another option to consider: using your brokerage account for financing.

Having a securities-based line of credit, or SBLOC, could provide you with access to cash so you can grab an investment opportunity or make ends meet when you're stuck in a jam.

Here's an example: Let's say you're surprised with a sudden high tax bill and would rather not empty out your savings or sell stock to pay it. You also know that your annual work bonus is coming up in a few months. You could tap into your SBLOC to bridge the gap for now, paying the loan off once your bonus hits your checking account.

SBLOCs use your taxable brokerage account as collateral to back a revolving line of credit. This means you can choose how much to borrow and pay back without having set payments over a defined period of time.

To qualify, brokerage firms offering this lending solution may require a certain account balance and will calculate the maximum credit available to you — the collateral value — based on the eligible securities (generally stocks and bonds) within your account.

With the volatility of the market, you won't be given a dollar-for-dollar loan, says Tolen Teigen, certified financial planner and chief investment officer at FinDec, a financial consulting company headquartered in Stockton, Calif.

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"Perhaps you can use 60 percent to 70 percent of the value of your securities portfolio as collateral," he says.

And the amount of assets you have at the brokerage firm usually plays into the interest rate you'll get.

Often, the more assets you hold at the firm, the lower your interest rate will be, which is why SBLOCs often make the most sense for those with larger account balances, Teigen says.

Though there are some hoops to jump through, establishing a SBLOC has advantages beyond avoiding capital gains tax consequences or undesired losses.

"It allows the investor to continue with their investment strategy without having to liquidate any holdings," says Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Mich. This means you won't disrupt your portfolio's asset allocation and can stay invested for the longer term.

"Typically, the investor has quick access to cash when they need to pull money from the line of credit, which creates flexibility," Milan says.

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Once your line is in place, you can usually access funds as needed within a few days.

You can't, however, use your securities-based line of credit to buy other securities or repay margin loans.

There are risks associated with securities-based lines of credit. One of the biggest is that the ups and downs of the market will affect the collateral value of your account.

When the value of the securities in your account falls below a certain threshold, the broker will issue a maintenance call, or an order to add more cash or securities to your account. If you're not able to add more cash, you risk having some of your securities sold to meet the call.

And you may face an unpleasant surprise: Your brokerage firm has the right to liquidate positions — the stocks, bonds and other securities you're currently invested in — without notifying you or asking for your input.

Additionally, rates for SBLOCs are variable, not fixed. So even though interest rates are low now, that won't always be the case, and your rate could rise over time.

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For these reasons, using your securities-based line of credit judiciously is important.

"An investor will need to determine the maximum amount of leverage they are comfortable with and develop a number of worst-case scenarios to test their fortitude and mettle," Blair says.

When taking on any form of debt, it's important to note a golden rule: Don't bite off more than you can chew.

Tiffany Lam-Balfour is a writer for NerdWallet.

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