Most small businesses have difficulty raising capital in starting a business—and even funds to survive the pandemic since the Paycheck Protection Program (PPP) for small businesses might not be enough. With this, business owners are looking for business financing alternatives.
Not a lot of people may be aware, but using your public stocks as collateral might be your best bet to keep the gears in your business greased and working. There are many reasons to opt for stock-based loans.
Securities Lending (Stock-Based Loans) is a Main Driver in the Modern Financial Market
As of April 2020, Tesla and SpaceX CEO Elon Musk has half of his Tesla stocks pledged as collateral for loans. It is truly hard to believe for the loan naysayers, especially that Musk’s net worth is now valued at $156.9 billion, making him the second richest man globally.
Musk’s business tactic is a great example (somehow) if you need a little push into choosing securities lending. Know that Musk isn’t the only one; other entrepreneurs are doing it too.
Fund investors are finding ways on how to make more out of their investment portfolios. They’re diversifying and are using their public stocks as collateral to get business loans. You can do it too. Not only are you enhancing revenues, but you can also now use your shares to start or expand your own business. You are hitting two birds with one stone, indeed.
Borrowing Against Your Stocks to Raise Funds is a Business’ Best Option
Securities lending is for everyone, even for small businesses. There’s a notion that only large firms and institutions can use their public stocks to apply for business funding—this is not true at all. If you are an owner of stocks, you cross one requirement from the loan application checklist. Go for it!
Stocks are liquid collateral. Banks and artificial lenders prefer liquid collateral such as deposits, stocks, mutual funds, and bonds as they have a higher loan-to-value (LTV) ratio. It means they approve loans fast, no matter how high the risk is. Also, they have the assurance that you cannot pledge your public stocks to another lender.
You don’t need to disclose how you’re going to spend your loan. In contrast to traditional loans, lenders aren’t as strict when you apply for stock-based loans. You have the freedom to do what you want with it, so you can efficiently grow your business.
How Does Using your Public Stock as Collateral Work?
Just like any other loan type for business financing, the compensation you get will depend on the value of the public stock you’re willing to use as collateral. Don’t expect that you get a 100% market equivalent for your loan. You got fees to pay too, which ranges around 2-8% of your collateral.
Remember that it’s not just the lender’s duty to always check the market value; as a borrower, you should too. Matt McCall’s model portfolio shows some great stock recommendations and a great analysis of how your public stocks are currently valued.
If unfortunately, the market value of your stock decreases, you need to offer additional collateral, or the bank calls your loan, and you even lose ownership. We don’t want that to happen.
Reliant Funding, one of the leading small business finance providers, can help you get the funds you need for your business ASAP. There’s always a perfect approach to get funding. It’s time to lessen the worry about not working capital and start tapping on your other resources (i.e., public stocks) to keep your business growing.