Portfolio loans are one of many options you can pursue to raise cash for your small business. Sometimes called a pledged asset line, these loans leverage your investment savings accounts and allow you to borrow up to 70 percent of their value.
What kinds of investments can I lever?
You may use stocks, bonds, mutual funds, and cash.
Who offers this form of financing?
Many commercial and community banks and investment brokers offer portfolio loans to their best customers, but few advertise this offering. Speak with a loan officer at your preferred bank to find out if this option is available for you.
What are the requirements of portfolio loans?
Most portfolio loans are relatively easy to qualify for, provided you have sizeable investments to lever and can prove your ability to repay the debt.
What are the terms?
Loan terms are set by the lender, and those terms can vary based on the type of portfolio loan you choose. However, there are some commonly used terms:
Loan minimum: Most lenders set a minimum borrowing amount of $100,000 or more.
Interest rate: Rates for jumbo portfolio loans can be as low as 2%, but cash-out portfolio loans and other portfolio loan product rates may exceed 8%. Rates are often lower than other loan products because they’re fully collateralized, protecting the bank in the event of default.
Loan term: Popular portfolio loan products offer terms between 1-30 years.
Closing costs: Common closing costs range from 0-5%, but the costs will vary by lender.
Fees: Loan origination fees often range from 0-5% of the amount borrowed.
Prepayment penalties: Some lenders charge a prepayment penalty for balances paid off in the first five or ten years of the loan. This penalty can amount to 1-5% of the loan value.
Will market fluctuations affect my loan?
Yes, the lender will require you to maintain a certain loan-to-value. If the value of your portfolio falls because of a decline in the stock market, your lender will require you to add additional funds to your account or sell securities at depressed prices to pay down the loan.
When would it make sense to take out portfolio loans rather than sell my securities?
You may consider a portfolio loan when you want to avoid capital gains and pay less interest on a loan than you might earn from a diversified investment portfolio. However, you should note that you may realize capital gains if you sell your investments or default on a portfolio loan.
Why would I choose portfolio loans over another form of financing?
Portfolio loans may be a suitable choice for you if you are self-employed, have less-than-perfect credit, have an unfavorable debt-to-income ratio, or require a loan for a property that exceeds current conforming loan parameters. However, there are other options you should consider before making your selection. Read our article, Your Go-to Guide to Raising Capital for Your Small Business, to learn about those options.
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