How many sources of liquidity should you have?
Proactive liquidity management allows for more flexibility when approaching purchases.
You most likely have access to multiple forms of liquidity: a credit card, cash and a home equity line of credit (HELOC). So do you really need another line of credit?
The answer, of course, is that it depends. But in most cases, access to credit is a positive as it creates flexibility, options and choice. This flexibility can protect you in emergencies and position you to seize opportunities.
Sometimes, it’s advantageous to have access to a credit card, cash, a HELOC – and a securities based line of credit1.
More options mean more flexibility
The advantage of a securities based line of credit is that there is no cost to set it up, no ongoing fee to have the facility, and no obligation to ever use it. But one of the primary benefits is that it gives you one more option to use when credit is needed.
When you are proactive about liquidity, you will have multiple solutions already set up, standing by. When a need arises, you can then decide which solution you want to use based on your goals, timeline and current rates. These solutions could be a credit card, a home equity line of credit and a securities based line of credit. With all of these in place, you’re in a flexible position of choice.
Which to use?
Some choices will be straightforward; some will be ambiguous. Take look at a few examples.
Straightforward (based on rate, terms or size):
- Borrow on my credit card at 15% or on my securities based line of credit at 5%? Use the line of credit. It has a lower rate and costs 10% less.
- What if I plan to pay the purchase off in 20 days? Consider using your credit card. With a credit card, there is no interest due until the first payment is due. With a line of credit, the interest starts from the day funds are drawn.
- What about large purchases? The size of the loan may rule out certain options. For example, if you need to borrow $200,000 to buy land and have a credit card limit of $30,000, a $100,000 home equity line of credit and a $500,000 securities based line of credit limit, only your securities based line of credit may be large enough or provide enough liquidity.
- What if I need to borrow $30,000 for 60 days, with options of a credit card (15%), home equity line of credit (5%) and securities based line of credit (5%)? In this case, the credit card is clearly not the answer. But either the securities based line of credit or the home equity line of credit would be good solutions. Your financial advisor can help discuss which option may be more appropriate given the details of your circumstances.
One of the biggest problems with some lines of credit is that they may not be there when you need them the most. A common example of this is a home equity line of credit when moving. Moving not only triggers several expenses, it also often has complicated timing issues related to the purchase and sale of a home. While there are occasions where the purchase and sale can take place on the exact same day, this often is not the case – especially for higher-net-worth families.
A borrower must repay a home equity line of credit when their home is sold. Sometimes a HELOC cannot be set up until after the move. There can be a time where funds may not be easily accessible – and they might not be accessible at all. In these situations, a securities based line of credit might not only be better, it may be the only solution.
Also keep in mind, in extraordinary circumstances such as the financial crisis, many home equity lines of credit were closed, frozen or canceled. Securities backed lines of credit may have been reduced as a function of market value, but they remained one of the few liquidity solutions that were readily available.
The power of liquidity comes down to what you have ready access to, what you need to accomplish and the timeframe you need to meet. The more tools you have at your disposal, the more you can unlock potential cost savings and flexibility.
1 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.