April 02, 2018
Do you need to pay taxes, manage short-term cash flow or address a critical financial situation — but also want to avoid liquidating your assets? Consider liquid asset secured financing.
Liquid asset secured financing lets you leverage assets in one or more investment accounts without liquidating the investment.
“In essence, your investment portfolio is used as collateral against a loan,” says Kristine Knight, private banking managing director for Private Wealth Management of U.S. Bank. “Monitoring occurs daily, so if there’s any market fluctuation, it would be detected immediately.”
Here’s what you need to know about liquid asset secured financing.
How to use assets as cash
Liquid asset secured financing is a viable method regarding how to use assets as cash or a line of credit. It requires no personal financial statement or tax returns for loans up to $5 million. 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.
This financing method can be used for several financial needs:
- Paying your taxes
- Managing short-term cash flow
- Financing special purchases
- Serving as a bridge loan
- Refinancing 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 financial opportunity at the last minute, such as the chance to win a bid for a second home. In addition, the line of credit may give you better control over your finances.
“Even nonprofit organizations are putting these types of loans into place,” Knight says.
For example, during 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.
What to consider when applying
Liquid asset secured financing is not without considerations. Keep in mind the following:
- A loan application and underwriting are required.
- Because collateral values are monitored daily, a drop in value of the pledged securities could result in a margin call.
- A downward market fluctuation could cause the loan to become due earlier than planned.
- Pledging assets can make it harder to rebalance your portfolio or sell the assets.
- The release date will be based on the individual assets that are to be pledged and have been deemed eligible by your bank.
- Finally, distributions from pledged accounts must be approved by your bank.
Know your options
“Without knowing about a liquid asset secured financing option, you might call a portfolio manager and say, ‘I need to liquidate $50,000 to pay estimated taxes,’ ” Knight says. “The portfolio manager would sell assets, which could incur capital gains taxes, and it might not be the best time for the portfolio manager to sell that investment.
“We show clients a number of options that may help prepare them for these types of situations,” she continues. “With the continued low-interest-rate environment that we find ourselves in, providing clients access to liquidity and the option to use their assets as cash without disrupting their goals is important.”