What Are the Best Options When Your Life Plans Require Liquid Options?

Clients frequently ask their financial advisors to assist them with their liquidity needs. Whether they want to purchase a vacation home, have a tax payment due or a new business venture, they want to know: what are the best options to make these moves?

A private banker can help clients figure out the best mix of investment and liquidity needs based on their short- and long-term goals. A popular option to help with liquidity is a Home Equity Line of Credit (HELOC). HELOC’s are appealing because interest rates tend to be lower than personal loans or credit cards.  Opening a HELOC, however, can take time (anywhere from weeks to months depending on the type of property) and requires a good deal of financial information. You should also be aware that HELOCs have lost some of their tax advantages due to changes in the tax laws.

Clients with marketable securities, such as stocks, mutual funds and bonds, could sell securities to raise cash but this could mean they would also pay transaction costs and possibly capital gains tax. You should also consider the cost of being out of the market.

A securities-based line of credit or SBLOC could be a good and often expedient way to meet liquidity needs. They are not without risk, however. Interest rate fluctuations could change the cost of borrowing, and market declines could reduce the amount a client can borrow, resulting in a call for partial repayment or additional collateral. In addition, a SBLOC cannot be used to purchase marketable securities; there is a government regulation that prohibits such a transaction.

Let’s look at some practical uses for a SBLOC. In a competitive real estate market, being able to prove liquidity is critical in a bidding competition. A SBLOC provides the client with the proof of funds needed and they do not have to sell their current home before buying a new one.

Whether it is the sale of a business, or some other transaction resulting in capital gains, a SBLOC is a good way to cover those tax obligations without depleting your cash or your investments. Keep in mind that these taxes must be paid when they are due to avoid penalties.

A SBLOC can also provide a business owner the funds to purchase equipment or augment cash flow. Even an established business owner may wish to acquire another practice. A SBLOC can provide them with the capital needed.

A family or business-related emergency or a natural disaster can put a strain on cash flow. Insurance companies are not always timely with the processing of claims, especially if it involves a flood or another unavoidable catastrophe. A SBLOC could be a valuable resource to begin the timely restoration of a property.

When utilized prudently, a SBLOC can be an excellent way for a client to capitalize on their investment portfolio without the downside of market risk and/or capital gains.