When the unexpected hits, liquidity matters

How securities-based lending can help you in the face of disaster.

While operational and technical continuity often take priority in disaster recovery planning, financial resilience is equally important. Too often, organizations overlook how financial stability will support their ability to recover and sustain operations during a crisis. There is a need for business owners to take a more holistic approach to disaster recovery planning; one that integrates financial preparedness.

Incorporating a securities-based line of credit (SBL) into your emergency preparedness plan can help you gain quick access to funds during a crisis, easing stress and aiding in rebuilding. Securities-based lending allows investors to use their portfolio as collateral to secure a loan. For business owners, this offers access to liquidity without having to sell investments, which is particularly advantageous in avoiding disruption to your long-term investment strategy.

Here’s what to consider when adding an SBL to your emergency preparedness strategy.

Understand the benefits

An SBL is flexible enough to help meet almost any business financing need. If your business is dealing with unexpected damage or cleanup, an SBL can provide quick access to funds, especially while you wait for your insurance claims to settle. In the case of an earthquake, for example, some recovery expenses may extend beyond regular insurance coverage. That’s where an SBL can step in. It can offer:

• Fast, convenient access to funds: An SBL typically requires less documentation and has a faster underwriting and application process than traditional loans. Depending on your situation and lender, approval can take just a few days. Additionally, funds are accessible through wire transfer, ACH or checks.
• Flexible borrowing structures and repayment options: Loan amounts are based on the value of the collateralized securities. Because the loan is backed by collateral, the lender takes on less risk and offers more flexible terms. These may include interest-only payments for a certain period.
• Variety of uses: An SBL can be used for most legal purposes, except for the purchase of securities. You can use these funds for repairs as you wait for an insurance settlement, to pay employees’ salaries as you get the business operational again, or to quickly replace inventory and equipment that was not completely covered by insurance.
• Cost-effectiveness: An SBL typically has no upfront, maintenance or closing costs, making it a cost-effective way to borrow. Additionally, the borrower can pledge multiple accounts to increase the credit line without additional financing costs.

Mind the potential risks

Like with any financial instrument, you should weigh all the factors before you commit. An SBL may not be the best option for every business owner. Before you decide that it should be part of your emergency preparedness plan, consider these aspects:

• Limited liquidity: Securities used as collateral can be sold in the open market, but the cash will be pledged to the loan. This limits borrowers in their ability to leverage the money swiftly.
• High concentration: If diversification isn’t carefully considered and the collateral is concentrated in a small selection of securities, the borrower faces greater risk tied to the performance of those assets.
• Market volatility: The value of securities used as collateral can fluctuate with market conditions. If it drops significantly (for example, below 50% of the closing day loan value), this may trigger a collateral call and force the borrower to provide additional collateral to avoid securities being sold to cover the loan.

Including an SBL in your emergency preparedness plan may give confidence that your business will continue operating during a disaster. Carefully consider the benefits and risks with your financial situation to determine if it’s the right fit for you and your business.

A Securities-Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards an SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect SOFR rates (or any successor rate thereto) that apply to your SBLC causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s non-pledged Capital Access account. Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, member FDIC.