You need cash. Maybe it’s a business opportunity that won’t wait, a tax bill that’s due, or a home renovation you’ve been putting off. Your investment portfolio looks healthy, but selling feels like the wrong move, especially if it would trigger capital gains taxes or pull you out of positions you believe in for the long term.
A securities-based line of credit, often called an SBLOC, offers a different path. It lets you borrow against the value of your taxable investment portfolio rather than liquidate it. Used carefully, it can be a useful financial tool. Used carelessly, it carries risks that are easy to underestimate. Here is what you need to know.
How It Works
An SBLOC is a revolving line of credit secured by the stocks, bonds, mutual funds, and exchange-traded funds (ETFs) in your non-retirement brokerage account. You pledge those assets as collateral, and the lender extends a credit line based on a percentage of their value, typically somewhere between 50% and 95%, depending on the types of investments and the lender’s requirements.
Your investments remain invested, allowing them to continue participating in market gains or losses and potentially generating dividends or interest. In most cases, you can continue managing or rebalancing the portfolio, subject to the lender’s collateral requirements. You draw on the line only when you need it, generally make monthly interest payments on any outstanding balance, and can typically repay principal at any time and borrow again later, much like a home equity line of credit.
One important restriction: An SBLOC is intended for non-investment purposes. The proceeds cannot be used to purchase, trade, or carry securities, or to repay a margin loan that was used to buy securities.
When It Can Make Sense
An SBLOC is generally useful for short- to medium-term borrowing needs, typically a few months to a few years. Common situations include:
Avoiding a taxable event. If your portfolio holds appreciated securities, selling to raise cash could trigger a significant capital gains tax bill. Borrowing against those assets instead lets you access liquidity while deferring that tax liability.
Managing uneven cash flow. Business owners and self-employed professionals who don’t receive consistent paychecks sometimes use an SBLOC to bridge gaps between income events without disrupting their investment strategy.
Covering a large, one-time expense. A tax bill, a home renovation, or a family financial need can sometimes be handled more efficiently through an SBLOC than by selling investments or taking on higher-interest debt.
The key phrase in all of these is “can sometimes.” Whether an SBLOC is the right choice depends on your specific situation, the composition of your portfolio, and how much risk you are genuinely prepared to manage.
The Risks Worth Understanding
This is where the conversation gets important. An SBLOC is not a risk-free alternative to selling. It introduces a different set of risks that require active attention.
Maintenance calls. If the market declines and the value of your pledged portfolio drops below the required threshold, the lender can issue a maintenance call. That means you must deposit additional cash or securities, or repay a portion of the loan, typically within two to three days. If you cannot meet the call, the lender may liquidate your holdings without prior notice and without your input on which positions to sell.
Variable interest rates. Most SBLOCs carry a variable rate tied to a benchmark index. In a rising-rate environment, your borrowing cost increases, sometimes meaningfully over time. The rate that looks attractive today may not look the same two years from now.
Forced sales and tax consequences. If the lender liquidates your securities to satisfy a maintenance call, you may face capital gains taxes on those sales, the very outcome you may have been trying to avoid. You also have no control over which positions are sold.
Portfolio concentration risk. A portfolio concentrated in a single stock or sector is more vulnerable to sudden value drops. If one holding declines sharply, it can push you into a maintenance call faster than a diversified portfolio would.
Before You Move Forward
An SBLOC can be a reasonable strategy in the right circumstances. A few questions worth working through before proceeding:
How much do you actually need to borrow? Lenders will often approve you for more than you should take. Borrowing well below the maximum reduces the likelihood of a maintenance call if markets move against you.
Do you have a repayment plan? An SBLOC works best as short-term financing, not an indefinite source of funds. Knowing how and when you plan to repay protects you from compounding interest costs and extended exposure.
What happens if the market drops? Think through what a 20% or 30% portfolio decline would mean for your collateral value and your ability to respond to a call. If the honest answer gives you pause, that is useful information.
Is this actually the best option? Comparing the cost of an SBLOC against other borrowing alternatives, including the cost of selling and reinvesting later, is a worthwhile exercise before committing.
Securities-based lending is not for everyone, and it is not something to set up and forget. But for the right situation, with the right portfolio and a clear short-term purpose, it can be a smarter way to access liquidity than the alternatives.
If you’re weighing this option, your financial advisor can help you think through whether it fits your financial picture. If you’re not yet working with us, we invite you to schedule a complimentary call to discuss your situation.