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A Margin Loan or an Asset-based Line of Credit?

Long ago and quite far away, it was once possible to buy $1,000 worth of stock, then use it as collateral for loans of as much as 90% of the value on some exchanges. That loan could them be used to buy $900 worth of additional stock. Once again, the stock owner could get a stock margin loan for 90%, giving him an additional $810 to invest in still more stocks. The process could go on until the investor’s margin loan amount was too small to reinvest. 

And thus was built the house of cards upon which the Great Depression and economic catastrophe spread around the world. The investor in this example started with just $1,000 worth of marginable securities. After he’d continually borrowed and bought additional stocks, the value of his holdings on paper climbed to 4-10 times that real investment amount, not considering any action adversely affecting his portfolio over time which is of course always possible. 

But adversity — or risk –always exists in the securities business. As you can imagine (and here I use a crude example)  If one’s actual investment was $1,000, and his multiply margined remainder was worth perhaps $4,000 on paper, the “cards” in this fragile arrangement (the stocks) would have to retain enough value that, if sold, they would at least repay the principal on the thousands of dollars in margin loan debt he would have likely taken to build his pyramid. 

The Securities and Exchange Act of 1934 was the result of complex deliberations at the highest summits of government. It divided securities-based lending into two basic groups: for the sake of simplicity, I will use my own non-jargon terms: margin loans and asset-based loans (all abased on eligible, marginable public securities). The two are vastly different for good reason. 

Legislators in the 1930s felt that to prevent the collapse of future stock markets, it was necessary to cap the release rate for margin loans at 50% of portfolio value. Thus, a person owning $1,000 worth of stock could borrow $500 worth of that same stock under the new regulations. This lower figure was created to make it more difficult to pyramid the public’s stock investments into unstable territory. These margin loans are intended for the purchase of more stock, so a safer limit of 50% was established. 

But legislators also understood that, provided the investor did not use the proceeds to purchase more marginable securities,  there would not necessarily be any logical reason to restrict the use of one’s stock, bond, and/or mutual fund assets (for example) for larger loans. After all, as long as they were prohibited from reinvesting their loan proceeds into the stock market, why would it matter? Their focus was on those buying stocks with their margin loan proceeds. Standard, asset-class-type loans against farmland, capital goods, or other tangible collateral had always been available. Cars were predictably declining assets, yet banks readily made loans close to 100% for many clients. 

This is where we at A. B. Nicholas felt we could make a contribution to the business community while also making a reasonable living providing a useful service. We originally worked with franchising via SBA loans, which were laborious, slow, and often insufficient for new franchisees. But we saw that many first-time franchise buyers came with significant stock portfolios that they intended to reluctantly liquidate to fund their new franchise costs. We gave them another option: To keep their securities working for them, but to tap them for up to 90% of the value provided that the proceeds were not used to purchase marginable securities per regulations. 

 Yes, one is risking more of their collateral with a 90% asset-style loan versus a 50% margin loan for stocks. But in practice, with the asset-based style of lending there is often a diversity of stocks, bonds, REITS, mutual funds etc. which allow the licensed lender advisor to juggle the portfolio makeup to avoid having to add cash or stocks to your collateral. One set of stocks that may be pulling the portfolio down, for example, could be sold and replaced with stronger stock(s) with higher loan-to-value sufficient to retain collateral value sufficiently. 

And given that the Asset-style loans and credit lines can be used for any legal purpose other than the purchase of more marginable securities, its flexibility, especially in the form of a credit line, is excellent. One can have their line in their back pocket, and owe nothing if unused. Yet that “insurance policy” would be there at all times. When college expenses call, your asset-based line can be just the right choice, for example. 

Why use A.B. Nicholas for REIT investing or business investing?

At A. B. Nicholas we saw the wisdom of building a network of fully licensed public, FINRA-member U.S. brokerage & bank execs to review our clients’ portfolios to determine the best interest rate and release rate for their loan or credit line. Our goal is to send your portfolio to enough lenders to ensure that you, our client, get the best rates and terms available. 

We built our network to give you an alternative to the standard stock margin loan. We think you’ll like your offer, which costs you nothing. In fact, A. B. Nicholas is paid a small commission of 1-1.5% of the credit line our network will have been able to arrange for you, but only after you have received your funds and terms as promised. Our goal is to leave every A. B. Nicholas client satisfied with their end result. 

So what’s right for you? A margin loan at 50% designed for the purchase of more stocks at interest rates of up to 7%, or an asset-based loan like A. B. Nicholas’ network’s LeverageLine program with rates as low as 1.75% and release rates, depending on the quality of the portfolio, at up 92%. You work solely with a fully licensed Certified Financial Planner or RIA, at no cost to you, to determine your final numbers. At any time you are free to terminate at zero cost. You may even terminate your standard, adjustable interest-rate LeverageLine after your credit line has been opened, provided that any collateral drawn has been repaid. While your portfolio anchors your credit line, you may still buy and sell securities within your portfolio, provided that your trades do not diminish the overall assessed value of the collateral portfolio. 

We say: If you want to buy more stocks, get a stock margin loan –  but if you are looking for a true credit line with the freedom, get an asset-style line that you control, so that you may draw and repay as you wish, much like a home equity line.