Securities-based lending: Risks, benefits and what to know before borrowing against your portfolio

Securities-based lending (SBL) can let you borrow money using the investments in your brokerage account as collateral. The securities stay invested, and the cash can be used for many things like a house, a tax bill or a business need. Because nothing gets sold, there's no immediate capital gains tax bill from selling investments. The trade-off: If markets fall enough, the lender can demand more money within days to maintain your existing line or sell your investments without asking which ones you'd prefer to keep.

What is securities-based lending, and how does it work?

Securities-based lending starts with going to a lender – usually a bank or brokerage firm – to request opening a line of credit backed by the investments in a taxable brokerage account. (You can’t use retirement account assets as collateral for SBL.) Stocks, bonds, exchange-traded funds (ETFs), mutual funds and Treasuries are the most common investments used as collateral. You pay interest only on what you've drawn and repay the principal amount you borrowed on your own schedule, often with no fee to open or maintain the line, depending on the line of credit. If you don’t use the line, you may not incur any fees, though it may depend on the terms.

How much you can borrow depends on what you're pledging. Lenders tend to offer you a line size less than the collateral is worth as a way of covering the risk of you not paying the money back. The more risk they need to take, the less they may lend you. For example, securities that swing a lot in value or that might be more difficult to sell – for example, those with lockup periods or low trading volume – might have a bigger discount and lower loan-to-value ratio.

SBL is not the same as a margin loan, which is money borrowed from a broker to buy more investments. With SBL, you borrow against investments you already own to pay for things outside the market.

A better comparison to SBL might be a home equity line of credit (HELOC). The main difference is that a house gets appraised once, while a portfolio gets repriced every trading day. That's why SBL may open faster – and why it can turn on you faster, too. Every SBL agreement sets a maintenance requirement, which is a minimum portfolio value relative to the line of credit. When the portfolio falls below that value, the lender may expect you to provide more collateral or reduce your SBL balance. And if you are unable to do that, the lender may liquidate your securities, which can trigger taxes.

Benefits: Why might investors use securities-based lending?

Securities-based lending can help you borrow against your portfolio without selling your investments. That may be attractive to investors who want to bypass or postpone a tax bill.

For example, say you need $100,000 to purchase something, so you sell $100,000 worth of stock you bought five years ago for $50,000. Your $50,000 profit gets taxed as a long-term capital gain, which can cost 0%, 15% or 20% at the federal level (and potentially more if net investment income tax is required; it all depends on your taxable income). And that’s before any additional state tax. Selling your assets to cash out the $100,000 does not result in $100,000. It would be less after you pay the taxes. Borrow against the portfolio instead, and you sell nothing: The number you borrow is the number you can spend.

There's a second cost to selling, and it’s one that never shows up on a statement. Money out of the market misses out on potential growth. In a J.P. Morgan Asset Management analysis of the S&P 500 from 2006 through 2025, $10,000 left fully invested grew to $80,619. An investor who missed just the 10 best days ended with $35,866 – less than half. While a single index over one stretch of time doesn't represent every portfolio (and past performance does not guarantee future returns), the cost of missing even a few strong days is the reason many long-term investors avoid selling at all. Borrowing keeps every dollar invested and compounding in the market.

Speed can matter, too. SBL can often happen in days, usually with no appraisal or setup fee. People might use SBL for a tax payment, a house that won't stay listed long, tuition bills or covering costs during an income slowdown. That ready liquidity may carry a household through a cash crunch without an investor having to touch their portfolio. Whether a liquidity need is planned or unexpected, it may be better to set up a line before you need it. That way, the funds are there when the moment comes, and you aren't scrambling to put financing in place under time pressure.

The tax picture depends on repayment. A borrower who repays the principal from other income – a salary, a bonus, the proceeds of a business sale or other cash – never sells the investments at all, so gains remain untaxed. One who may decide to eventually sell invested assets to retire the line of credit has deferred the bill rather than erased it, potentially allowing their portfolio the opportunity to grow more in the meantime.

Understanding the risks of securities-based lending

When it comes to SBL, the biggest risks come from an unexpected move in the value of your investments that are being used as collateral for your line. When the portfolio falls below the maintenance requirement, the borrower gets a margin call (sometimes called a maintenance or collateral call) and has a window of time to add cash, pledge more investments or pay down the line of credit. Miss the window, and the lender may sell your investments.

Margin calls can occur when markets are down, exactly when nobody wants to sell. And a forced sale is still a sale: Any profit triggers the tax bill the borrowing was meant to avoid.

Another consideration is the interest rate. An SBL rate is a benchmark rate plus a markup, called a spread. The benchmark is the base rate, set by markets and influenced by policymakers to reflect the broad cost of lending in the economy. The spread is priced to your specific line of credit and the collateral behind it. Most lenders use the Secured Overnight Financing Rate (SOFR) as the benchmark rate, which moves when the Federal Reserve makes interest rate moves. When it climbs, the cost of money you already borrowed climbs with it. (You may see a promotional fixed rate offered on an SBL line of credit, but it's important to understand how that differs from a floating rate and compare the details of both options before locking in a rate.)

Two habits may add more risk: borrowing against a more concentrated portfolio, since a single company or investment can fall far faster than a diversified portfolio, and borrowing beyond what you can manage to pay back – that could turn a routine market dip into an emergency.

Costs and terms to consider before you borrow

Before opening a line, take time to understand the terms of the agreement:

When securities-based lending may fit (and when it may not)

Borrowers who manage their SBL well may have a few things in common: a large, diversified taxable portfolio; a short-term, specific need for the funds; and money they can point to as a clear repayment plan before drawing.

The alternatives have trade-offs of their own. Building a cash reserve outside the market costs only the returns it might have earned. Selling investments leads to a tax bill even though it keeps things simple. A HELOC may take longer to open, but it doesn’t carry the stress of daily repricing. A personal loan or credit card needs no collateral but often comes with a higher interest rate.

Practical checklist: How to use securities-based lending more safely

Careful borrowers tend to have several common practices. For example, they may do the following:

The bottom line

Securities-based lending may help address a real problem: needing cash while owning investments that are doing exactly what they're supposed to do. Borrowing against your securities keeps your portfolio invested, skips the tax bill a sale would trigger and moves relatively quickly. Keep in mind that collateral is repriced every trading day and a lender may sell assets if your portfolio value drops below the margin call threshold. Establishing a reasonable line size against a diversified portfolio can make SBL a useful tool. But if you stretch to the maximum against a concentrated position, it’s important to keep in mind that risks are more prevalent.

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