Conventional small business loans vs business credit line...
You may be familiar with it. You may have even applied for one. It might be a secure or unsecured loan, but it will likely be far less than you need to buy or operate your business for an extended period of time. You could go for an SBA loan, although with SBA loan interest rates now approaching 9%, this is a very costly option, particularly when inflation is raging and rising. Other conventional bank financing options usually require a lien on every asset you own, high interest rates, long delays to approval (which can easily mean watching the business site you coveted going to a buyer with immediate cash) and the typical bureaucracy of a government agency (SBA) or a giant commercial bank/brokerage.
We invite you to consider our LeverageLine stock loan program as part of your overall investment strategy. Whereas we do not provide any specific investment advice or buy-sell advice of any kind, we are in a position to comment on the overall strategy of treating the securities-based credit line element of your planning as part of your investment strategy as well.
Why? How?
If, for example, you consider your LeverageLine credit line as an integral component of your overall investment strategy rather than as an independent loan program, you will be better able to comprehend the potentially enormous opportunity costs associated with lending your stock portfolio in order to acquire a credit line to expand your business. You can also build business credit at the same time.
What about the interest on my business credit line?
Let’s begin with the simple fact that by pursuing a stock loan quote via the A. B. Nicholas network, you are likely to save significantly on interest payments. Depending on the size of your credit line or loan, this could be a very substantial savings over retail. Saving these costs means more cash for your business operations, which is especially important during first-year operations when the premium is on marketing and “getting the word out.”
And a savings it is! Let us look at this real world example from 2020.
John Hanson was a 64 year-old computer programmer who had long-coveted the idea of owning his own computer repair business. He contacted a leading franchise operating in his state, and set his eyes on a particularly site to lease. He put a small down payment on it to hold it until the $325,000 he needed to complete the purchase (including leasing costs, utilities, franchise fees, equipment, stock, salaries, marketing costs).
His original plan was to obtain an SBA loan by putting up his house and car as guarantee. However, the SBA officer indicated that all of his assets needed to be included, from his $430,000 stock portfolio to the piece of lakeside land he’d purchased with the hope of building a vacation cottage in the future.
For all this, his wait time was at least 3 months. And he was told that when/if it is approved, the interest rate would be 9.1% APR. On a $350,000 loan, which had to be taken all at once, and five years to repay, this would have cost John $31,850 year year in interest alone. For the life of his $350,000 loan, he would pay over five years $159, 250. In other words, John would be paying back a total of half a million dollars – about $509,000 – for the privilege of accessing the $350,000 he needed to realize his entrepreneurial dream.
His stocks would be part of his assets, as far as the bank was concerned. Thus, if he chose to sell a portion of his stock portfolio to raise cash, he’d need to report this to the lending bank and SBA as a substantial change in the borrowers asset profile. This could result in the declaration of default by the bank or other penalties imposed by the government. After all, from their perspective, if you should skip out on repayment, they need liquid assets available to quickly make the loan whole by selling off John’s assets. Yes you can make changes to your stock portfolio, but whatever you do must be approved beforehand by the bank and the guarantor, the federal government. Again, whenever a bureaucracy is involved in any financial matter, long delays are the norm. John risks losing the business opportunity and the site, and with his SBA loan, he will be paying through the nose.
Not a very pretty picture, most would agree.
SBA Loans just don't cut it.
The problems associated with SBA loans is one of the reasons A. B. Nicholas was formed over a decade ago. We saw that SBA lending was not getting it done for a huge swath of new entrepreneurs and we wanted to do something about it. This led to our interest in having securities portfolios as collateral, avoiding having any other asset take a lien or be in danger of confiscation in the case of default. For the LeverageLine program offered via the A. B. Nicholas stock loan network, your securities portfolio is the guarantor of your loan, not your house, boat, vacation property, etc. Your securities portfolio alone.
This means from the perspective of your overall investment strategy, you can remain investment in your stocks and bonds with LeverageLine. Rather than liquidate your holdings to fund your business, sacrificing any future profit from your stock investments, you can “have your cake and eat it too” in the sense of keeping your portfolio but obtaining up to 90% of the value in a low-coast, low-interest, interest-only-repayment-required line of credit from A. B. Nicholas.
Then, to start: Your overall investment strategy can stay the same if you use a LeverageLine funding solution. You keep the stocks you chose, the stocks you got from your family, and/or the stocks in your trust fund. But you also have the cash you need to reach your business goals.
So John went to A. B. Nicholas and applied. He had a mixed portfolio of low-risk Treasury bonds, blue chip stocks, and some higher-risk stocks. ABN returned an offer of 87% loan-to-value (release rate) and a rate of only 5.4%. To put this in perspective, John received $374,100 in credit with his $430,000 stock portfolio as the sole collateral for the credit line.
From an investment standpoint, any cash expended is cash out the door, and must return value greater than that which was spent if one’s investment strategy is to succeed. Thus, saving money is also a positive direction, since it frees more cash for other purposes. This can be seen as a gain, rather than a loss.
If John’s SBA loan at 9.1% means a total payback of $509,000 over five years, the yearly LeverageLine cost by comparison drops to $20,000 a year, a yearly savings of almost $12,000 — money that can then go back into the borrower’s business investment. LeverageLine total payback was $474,000 — a savings over five years of $35,000.
$35,000 additional cash dollars for a new business in its first give years can be important to the success of the business, as it could be used for anything, from unexpected repairs to aiding monthly cash flow. These are not minor issues to a business attempting to establish a footprint in the market.
Expanding your business credit by being your own banker...
But there’s more advantages to the A. B. Nicholas LeverageLine program via our network. That is the fact that for our standard LeverageLine, your repayment requirement will be interest-only, and you will be free to repay principal whenever you wish as long as the loan interest payments are current. This converts our LeverageLine into a “be your own banker” type vehicle allowing you two take whatever you need while leaving what you don’t need. Some even treat their credit lines as “insurance policies” in case of disaster.
You can see when it comes to SBA vs LeverageLine, we win hands down. Faster, cheaper, and more cash available for use, yet all the same excellent licensed public institutions you already know (which we can’t mention by name here for copyright reasons). That portfolio likely contains your own, personal investment picks. At. A. B. Nicholas, was ensure that only licensed professionals with strong FINRA records ever quote our clients.
Turn your personal investments into a smart overall strategy by putting your stocks to work. When you are ready, we at A. B. Nicholas are prepared to assist.