5 common myths about securities-backed lending

05/30/2024 — Key takeaways:

• The securities-backed lending market showed no signs of slowing as market activity reaches new levels.
• As SBL becomes more popular, misconceptions about the benefits and risks of the product may leave clients confused.

As Securities Backed Lending (SBL) sales continue to grow in popularity (the industry grew by 40% from 2019 through 2022)¹, your clients could still be in the dark about how SBLs work. They may assume that only the wealthiest of individuals can utilize this option, or that it takes too long to access cash—common misconceptions that aren’t necessarily true. Below, we’ll highlight the top 5 myths about SBL to help you address client misconceptions.

Myth #1 SBL can help only the wealthiest investors

• While it’s true that SBL used to be reserved for the ultra-wealthy, it’s become much more accessible in recent years.
  • It’s now a popular source for funding luxury items, real estate, education expenses and paying tax liabilities, among other things.
• Lenders will determine the value of the loan based on the value of an investor’s portfolio, using a SBLOC contract to specify the maximum amount an investor can borrow.
• The types of collateral lenders may allow include stocks, investment-grade bonds, mutual funds or cash and cash equivalents like certificates of deposit.
• As SBL becomes more popular, the minimum amount needed to open a SBLOC contract is getting smaller.

Myth #2 SBL takes too long to access cash

• One of the most common myths we hear about loans in general is that it takes too long to actually get access to cash when needed. Depending on the type of lender and how much information is needed for the application, funds can take weeks to be sent.
• However, the SBL industry is working to speed up that timeline using digital and online processes and paperwork so investors have the cash they need when they need it.
• With SBL, it takes investors 90% less time to initiate their first draw compared with the time required at the start of 2020, according to Supernova Technology.
• Additionally, some companies have made it so clients can access cash in as little as hours or days.
• With quick access to money, the loan is perpetual, or with no maturity date, allowing clients to repay and borrow again later as often as they like.

Myth #3 Investors must have a need for SBL before they try it

• Financial professionals know that the best defense is a good offense when it comes to preparing for the unexpected.
• As part of a proactive debt management strategy, many advisors recommend having credit available before having a need.
• Investors generally only think of loans when they need a way to pay for unexpected expenses, want to invest in real estate or want to reach a personal goal.
• They may think they need to liquidate a portion of their portfolio, which could affect their future savings goals and has the potential to trigger capital gains taxes.
• SBL can be used to access cash without disrupting investors’ portfolios and can be opened proactively, so funds are available when clients need them.
• Many companies, including Nationwide, also allow lines to be opened with no fees attached – making a proactive strategy a cost effective one as well.

Myth #4 All debt is bad debt

• Not all debt is created equal.
• As part of a proactive debt management strategy, many advisors recommend having credit available before having a need.
• Leveraging investments to access cash can bring holistic net value to a portfolio.
• When strategically used, debt can be leveraged as an asset, helping investors take advantage of opportunities and even supplement retirement income and address estate planning needs.
• SBL offers easy access to cash with flexible repayment, unlike high-interest consumer debt like credit cards and personal loans.

Myth #5 SBL is only beneficial in low interest rate environments

• While low interest rate environments are typically better for SBL, they also stand up in high-interest rate environments like we’re experiencing right now.
• Investors can generally get a lower interest rate through SBL than traditional loans, home equity lines of credit or credit cards since it’s their investments being used as collateral.
• Investors’ investment portfolios also stay intact to take advantage of the higher earning potential in the market as well as avoid paying capital gains taxes when liquidating.

Final thoughts

Securities-backed lending, despite common misconceptions, can be an attractive option for your clients in need of options to fund a large expense. By clarifying the myths and realities of SBL, you can help your clients make the most informed decisions when it comes to their financial futures.