How to use liquid asset secured financing for short-term cash flow needs

Financial planning

Liquid asset secured financing is a flexible line of credit secured by eligible assets in one or more of your investment accounts.

“In essence, your investment portfolio is used as collateral against a loan,” says Vivian Chow, senior vice president and regional banking manager at U.S. Bank. “In a volatile market environment, it becomes more important to not have to liquidate investment assets. This type of financing offers greater liquidity and overall financial flexibility.”

How to use your assets as cash

Liquid asset secured financing, also known as securities-based line of credit or portfolio line of credit, requires no personal financial statement or tax returns for loans up to $5 million (like most lending options, however, it does require a loan application and underwriting). It offers both consumer and commercial clients attractive interest rates and flexible repayment of principal. In addition, liquid asset secured financing features a streamlined application, expedited approval process and on-demand access to available funds.

You can use the cash to meet a wide range of financial needs:

  • Pay taxes
  • Manage short-term cash flow
  • Quickly finance special purchases
  • Serve as a bridge loan
  • Refinance higher interest rate debt

Because this line of credit offers you flexibility and liquidity, it can be particularly useful when you’re presented with a sudden financial opportunity or challenge. In addition, the line of credit may give you better control over your finances.

As an example, you may need cash to close on a new home, but your portfolio is down due to market volatility. You don’t want to have to sell securities at a loss so instead take out a line of credit secured by your portfolio to generate the cash needed.

Liquid asset secured financing can be particularly useful when you’re presented with a sudden financial opportunity or challenge.

Or, if you’re a small business owner that needs cash to temporarily cover payroll and other expenses, you can take out a line of credit secured by your business or personal portfolio. “Even nonprofit organizations are putting these types of loans into place,” Chow says. For example, in years when donations and grants are not adequate, a nonprofit may have difficulty lining up the timing of projects. Rather than liquidating endowment funds or pursuing more expensive financing to cover operating expenses, a nonprofit can use a portion of the endowment fund as collateral without disrupting overall investment objectives.

Considerations with liquid asset secured financing

As with any financing option, it’s important to understand how the current economic environment may impact your ability to borrow and how much it may cost. There are two factors in particular to keep in mind when considering liquid asset secured financing.

  • Interest rates. Liquid asset secured loans have adjustable interest rates, which means the interest rate you pay is based on a benchmark rate. As interest rates rise, so typically will the amount of interest you pay on your loan.
    If there’s an indication that interest rates will rise, you may want to secure financing now to obtain a more favorable interest rate. It’s also important to consider the amount of time you’ll need prior to repayment. It’s best to use liquid asset secured financing for shorter-term funding needs (generally a few months to a few years) to minimize your exposure to interest rate fluctuation. For mid- to long-term financing needs (generally more than 10 years), a fixed-term interest rate loan maybe more appropriate.
  • Market volatility. Because the amount you have available to borrow is tied to the value of your overall portfolio, if the market experiences a decline, the overall value of your portfolio, or collateral, is also reduced. If your collateral is worth less, you may be asked to bring the outstanding loan amount back into alignment with the overall value of your portfolio. This is known as a margin call. If this happens, you’ll have to repay part of your loan, provide additional collateral, or sell some of your assets to cover the shortfall, which could create a tax liability.
    Chow says, “We monitor the market daily, so if a fluctuation occurs, it would be detected immediately. We’d then work with you to resolve the situation and bring the account back into margin as soon as possible.” You should keep in mind the need for a secondary funding source or a means to readily pay the line of credit down or add additional eligible collateral in the event of a margin or maintenance call.
    A downward market fluctuation could also reduce the amount you can borrow, as it’s directly tied to the value of the assets you’re using as collateral. If the value of your collateral decreases, your flexible line of credit also decreases.

Know your options

Even in times of rising rates or increased market volatility, opportunities will present themselves that may require you to access additional funds. Your banker can help you determine if liquid asset secured financing is right for you.

“We show clients a number of options that may help prepare them for these types of situations,” Chow says. “In times of economic uncertainty and market volatility, providing clients access to cash without disrupting their investment goals is important.”

Learn about U.S. Bank Wealth Management Banking services.

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