By Jeff Smith

Investors seeking liquidity can find an effective cost of borrowing using ETFs as collateral. Similar to a traditional EFH securities-based loan, financing using ETFs offers attractive terms, such as a 75% loan to value (LTV) on a three-year term for qualifying ETFs. [View the full infographic]

Here's how it works: let's say John needs liquidity, but doesn't want to liquidate his ETF shares. He decides to use $1m worth of SPDR Gold Shares (GLD) as collateral. The shares are transferred to EFH for a typical three-year term. In return, EFH provides John with a 75% LTV, or $750,000.

For EFH, there's no restriction on how John uses the loan proceeds. He can use the funds to expand his business, pay off another loan, or even invest back into the market, keeping the loan shares as a market hedge.

If the ETF has dividends, many EFH contracts are written so that the interest rate cost for the loan matches the dividend, regardless of how that may vary. If the ETF doesn't have a dividend, the interest rate is typically 3%.

At the end of the three-year term, an identical number of ETF shares are returned to the borrower. If the ETF appreciated over the term, the appreciation is transferred back to the borrower. Returning to the $1m example: if the ETF shares increase by 10%, EFH will transfer the GLD shares, now worth $1,100,000, back to the borrower.

If the ETF depreciates, the borrower has the option of walking away and keeping the loan proceeds, or taking the shares back at the lower value. Using an ETF as collateral offers protection in case of such situations.

For example, say John decided not to liquidate his $1m worth of ETF shares or use it as collateral. If the ETF declined by 30%, the value of his shares would be $700,000 and he would have lost $300,000.

If John used his $1m worth of ETF shares as collateral, he would have received $750,000 in loan proceeds which acts as a hedge against any further decline. The EFH loan is non-recourse which allows EFH to only look to the pledged shares to satisfy the loan obligation.

Using an ETF as collateral is an effective tool for those seeking liquidity. It has the upside advantage if the ETF shares appreciate, as well as a degree of downside protection if the ETF shares depreciate.

By Al Christy

One of the first questions we at EFH get from prospective lenders is how a stock-based loan compares to a margin loan. Both allow an individual or company to use securities as loan collateral, but the two loan options vary in terms and flexibility.

Margin loans are typically provided by a brokerage firm and the borrower must be prequalified to obtain a margin loan. There is no qualification process or credit check at EFH for a securities-based loan. The average EFH stock loan transaction ranges from $100,000 to $10 million. In addition, stocks that have a current share price of less than $5 are typically not eligible for a margin loan. These lower priced stocks are still eligible for a securities-based loan.

To illustrate the differences between the two types of loans, let's use this very simplified example of Jane, a business owner who needs liquidity to expand her business. [View the full infographic.]

Funding and Terms

Since a stock loan has a higher loan-to-value ratio (LTV) than a margin loan, an individual or business will need to put up less collateral to obtain funding than if one was using a margin loan. If Jane is seeking a $200,000 through a securities-based account, she will need to transfer securities valued at $285,714.29 as collateral. That's a 70% LTV.

On the other hand, if Jane is looking to obtain $200,000 using a margin account, because of brokerage house rules she'll need to transfer $400,000 as collateral, a 50% LTV. The difference is nearly $115,000.

Using a margin account, Jane will also incur a higher annual interest rate cost compared to an EFH securities-based loan, which typically carries a fixed annual 3% interest rate.

Market Fluctuation

In the typical three-year term, market fluctuation is inevitable. With a securities-based loan, Jane receives greater protection against a downside market.

With a margin loan, Jane's securities have a buffer, which represents the acceptable percentage the security can decline in daily market fluctuations. The size of the buffer depends on the lender. The typical range for a buffer is 10% -20%, but can be changed by the lender at any time.

So, if the $400,000 Jane put as collateral for the margin loan decreases by more than 10% (that is, below $360,000), one of two things will happen: Jane needs to pay the difference, or the lender has the right to sell a portion of securities in her portfolio to make up the difference.

With a securities-based loan the formula for calculating when Jane would receive a default notice is pre-determined: it is [share price x LTV amount] x 80%. For Jane, this would mean ($285,714 x 70%) x 80% = $159,999.84. Thus, Jane would only need to cure her default if her collateral dips below $160,000, rather than the decline for a margin loan to $360,000.

Jane also has the option to walk away from the EFH loan at any point and keep the initial loan proceeds without further obligation.

Maturity

When the loan matures, Jane receives the same number of collateral value as she originally transferred. As one can see, Jane receives a higher balance at maturity using a securities-based loan and she already has received the unencumbered loan proceeds.

A securities-based loan reduces the risk of market fluctuation and provides attractive terms, such as a higher LTV ratio, lower fixed-interest rates, and other advantages over conventional margin loan options.

By Jeff Smith

According to a report put out by the National Federation of Independent Business in August, uncertainty over economic conditions remains one of the most severe problems for small-business owners. Regardless of the election outcome, uncertainty over business improvement and lending opportunities will remain. With traditional capital scarce, both business owners and individuals need to find alternative methods to gaining access to liquidity.

If you have a Securities portfolio valued at $200,000 or more, a securities-based loan might be an appropriate option for you. A securities-based loan uses equities as loan collateral for a typical period of three years. For example, an individual has stock in Company X and believes the stock will appreciate in the coming years. Rather than liquidate his position in Company X, the shareholder transfers the shares to the lender and receives the loan proceeds.

One of the most important features of a securities-based loan is the security that it brings. If Company X's stock appreciates during the loan term, the individual retains 100% of the market value at maturity. If the stock significantly declines, the individual can walk away from the loan and keep the original loan proceeds, with no further obligation.

This July, the EFH Executive Lending Survey was undertaken to gain insights into the lending patterns and vehicles used by current and former officers of U.S. public companies. Of the 400 executives surveyed, more than half (57%) would recommend a securities-based loan to a close friend. As seen in the graph on the right, 13% would recommend a securities-based loan for professional use only, 15% would recommend for personal use only, and 29% would recommend for both.

As discussed here, a securities-based loan offers greater flexibility and more attractive terms than many traditional vehicles, including lower interest rates. Whether to expand a business, invest in company inventory, or use the liquidity for personal reasons, the option of how you use the loan is yours.

A securities-based loan is also non-purpose, allowing the borrower to invest in what he or she might need, whether it is expanding a business or fixing the roof. Since the loan is also non-recourse, if the value of the security has a steep decline, the borrower has the option of terminating the loan, or keeping the loan proceeds with no further obligation. If the security appreciates, the borrower retains 100% of the upside market value after paying back the original loan.

In today's market, a securities-based loan provides flexibility and favorable terms. To learn more about how EFH holds and returns securities to borrowers, please click here.

By Al Christy

For individuals and businesses seeking working capital, a securities-based loan can provide greater flexibility and more attractive terms than many traditional vehicles.

As illustrated below, a securities-based loan offers a low, annual fixed interest rate—as low as 3%—typically over a three-year term. For a $500,000 loan, the borrower would pay $15,000 per year.

To compare, a borrower looking to obtain a $500,000 personal loan from a bank, if they qualify, would pay nearly a 9% interest rate (8.99%), which is 45,000 .

Our model allows EFH to execute a securities-based loan at attractive terms. With a traditional loan, a bank lends to an individual based on the individual's credit worthiness and income potential. Furthermore, traditional lenders may limit ways the funds can be used, such as buying a house or other substantial purchases.

With an EFH loan, an individual proposes collateral to be held by EFH for a set period, typically three years. The collateral can be equities, bonds, or options. EFH determines the viability of the loan and calculates the loan-to-value (LTV) ratio and the loan's fixed interest rate. Once the terms are agreed upon, the individual transfers the specific collateral to EFH. In turn, the individual receives the funding, typically within three days, which has no usage restrictions.

If the value of the collateral has a steep decline, the borrower has the option of terminating the loan, and keeping the loan proceeds without further obligation. If the stock appreciates, the borrower retains 100% of the upside market value. At the end of the loan, the borrower repays the loan; and EFH returns the same amount of identical collateral originally used. There are no fees and no closing costs.

You can learn more about the benefits of a securities-based loan by clicking here.

By Jeff Smith

Demand for securities-based, or stock loans is growing rapidly among institutions and individual borrowers. As of September 2012, EFH has seen the number of loan transactions increase by 17% compared to 2011, showing the vehicle to be a viable alternative to traditional lending sources.

In this global lending slowdown, a stock loan is able to provide attractive terms in all markets. For a small business owner here in Indiana to an international shareholder in Singapore, the EFH model provides the advantage of a low interest-rate, a high loan-to-value (LTV) ratio, and downside protection from the market.

In the EFH Executive Lending Survey, 400 current and former officers of U.S. public companies were asked to identify the most important feature of a securities-based loan. As noted in the graph to the right, nearly half selected the low fixed interest rates (typically 4% or less), and 34% selected the ability to receive up to 80% of one's securities' value in a loan.

To view the complete results of the survey, please click here.

A securities-based stock loan is also non-purpose, allowing the borrower to invest in what he or she might need, whether it is expanding a business or fixing the roof. Since the loan is also non-recourse, if the value of the security has a steep decline, the borrower has the option of terminating the loan, or keeping the loan proceeds with no further obligation. If the security appreciates, the borrower retains 100% of the upside market value after paying back the original loan.

In today's market, a securities-based loan provides flexibility and favorable terms. To learn more about how EFH holds and returns securities to borrowers, please click here.

By Al Christy

This July, Equities First Holdings conducted the first EFH Executive Lending Survey. In it, we asked 400 current and former officers of U.S. public companies about their borrowing activities, their thoughts on the lending environment, and which vehicles they used and recommended.

I'm very encouraged to report that nearly three fifths (57%) of participants would recommend a securities-based loan to a friend for business or personal use, and overall 87% were familiar with the financing option. Nearly one-fifth (19%) of the executives we spoke to have actually pursued a securities-based loan.

The graph to the right shows which options were pursued. Over a half of those surveyed (53%) executed a loan or other financing option in the past three years. The top loan uses were a personal loan from a bank (23%), a second mortgage (17%), and a refinance with cash out (16%).

Looking at future lending, in the next twelve months, 29% of the respondents said that they plan to obtain a personal loan from a bank, 21% plan to refinance with cash out, and 17% plan to obtain a credit card loan as methods of financing, all increases in these categories.

Compared to the more traditional lending vehicles, a securities-based stock loan provides the borrower with lower interest rates and a higher loan-to-value (LTV) ratio. For individuals and institutions seeking a loan for a business or personal loan, this type of loan can provide greater flexibility and downside protection from the current volatile market.

To view the full survey results, please click here.

Al Christy 

In the mid 1990's, I had founded a mortgage banking firm that specialized in commercial, residential, and small business loans. In my experience, I found that there was a gap in the ways borrowers were able to obtain loans. The most common option was available through traditional commercial banks. However, approvals became much more difficult if there was a decline in the economy. The alternate option was a margin loan provided by a brokerage firm. A margin loan though wasn't always available to interested borrowers and had significant disadvantages, such as a margin call, if the stock lost value. There was a need in the market for individuals and businesses to be able to successfully leverage the equity in their portfolio and attain liquidity, whether for expanding a business, leveraging an investment or even personal use.

I founded Equities First Holdings in 2002 to provide a solution to this need. One of my first transactions was a loan to a family-owned apple orchard—at the time, the tenth largest producer in the country. It was on the verge of filing for bankruptcy. The family needed $3.5 million for their 24 growers and to keep the farm out of the courts. They had exhausted their commercial loans and had no alternatives for financing. Fortunately, they had stock holdings. Through Equities First, the family was able to receive the needed amount in 5-7 business days and save the farm. The orchard is still in business today.

While every story isn't as dramatic as the apple farm, we have made a meaningful impact on many clients' lives.

Throughout Equities First's ten-year history, we have worked with global financial services firms, leading asset management companies, investment banking houses, private equity firms, commercial real estate firms, small business owners, and ultra-high net worth individuals. Our unique loan process has evolved to provide the borrower an efficient and transparent opportunity to leverage their equity by offering lower and fixed interest rates, higher loan-to-value ratios, and greater flexibility than margin or traditional loans.

By Al Christy

Many times when I first meet a potential borrower they are unaware of how far they can leverage their securities. A securities loan allows the borrower to have greater flexibility to lend against either small cap stocks or even equities of any market cap that trade for less than $5.00, provided the shares have an average daily trading volume of at least $50,000 in trading value. On a selective basis, Equities First will also consider fixed income instruments as collateral. In contrast, an eligible security for a margin account needs to be marginable and trade at $10.00 per share or higher.

With a securities loan, virtually all types of securities can be used. U.S.-listed stocks, as well as shares traded over the counter, and those traded on most international exchange listed stocks are eligible. Equities First clients are based in the United States, and in many international markets, including Hong Kong, Singapore, Australia, Dubai and the United Kingdom.

Typically, the borrower comes to Equities First through a financial intermediary, such as their broker, attorney or tax advisor. Every transaction we complete is customized and private. As an example, Equities First was able to execute a series of loans that included up to 12 laddered loans of a particular security with one individual borrower. Furthermore, the borrower receives any future appreciation of the asset when the loan matures.

Equities First is able to provide rapid liquidity on many types of securities traded globally.

Al Christy 

In May 2011, The Financial Industry Regulatory Authority (FINRA) issued an investor alert on stock-based loan programs, noting that they can have potential risk concerns. We at Equities First agree with FINRA on the importance of our clients being aware of the details of our stock lending process and the potential consequences. Unlike some of our competitors, Equities First is dedicated to providing an in-depth loan agreement, and reviewing it with borrowers so that they are aware of what can happen during the process.

Below are some questions FINRA recommended investors ask, as well as our answers.

1. What happens to my stock once I pledge it as collateral?

Once an investor pledges his or her collateral, the assets are transferred to one of Equities First's global custodial accounts. For the loan term period, Equities First owns the collateral and has the authority to trade the stock, which in turn enables Equities First to offer lower-than-market interest rates and higher LTV ratios to its clients. At the end of the term, Equities First returns the equivalent number of shares to the investor.

During the loan term, Equities First provides statements every quarter that summarize the interest charge and any dividends to which the shares are entitled. The investor has the additional option to request the current valuation of his or her pledged agreement at any time during the loan term. For more information regarding how Equities First holds and returns stock that has been loaned, please see Jeff Smith's blog here, Managing Director at Equities First. (include hyperlink to "How Equities First holds and returns stock to borrowers" blog. )

Many of our clients choose a stock-based loan over other financing options due to the tax advantages. However, each loan situation is unique, and we recommend that all our clients speak with their tax advisors regarding any tax consequences.

2. What benefit does the promoter receive for recommending the program?

Most clients come to Equities First through a financial intermediary, either a financial advisor, attorney, or broker. If a broker refers Equities First to a prospective client, they are eligible for financial compensation. In our ten-year history, we have not mass advertised and instead relied on such brokers to promote our program. As you will see in the "Results" page of our website, available here, many of our clients have become repeat users.

Equities First is referred both by brokers and individuals who have completed transactions with us.

3. Does the lender have audited financials?

FINRA recommended potential investors to ask this question in order to assess the potential strength of the lender, and determine if it was capable of returning the pledged collateral back to the investor. As with any private company, audited financial statements are unavailable to the public, primarily for competitive reasons. However, here are some facts I can share with you:

1) In Equities First's ten-year history, we have always funded on time and returned the pledged collateral to the investor.

2) Equities First has completed over 600 successful loans in both the United States and international markets.

3) The completed transactions had loan amounts that ranged from $100,000 to $10,000,000.

Jeff Smith 

When a borrower sends Equities First the background information on a security he or she would like to use as collateral, we typically execute a quick turnaround and funding. Virtually all types of securities can be used as collateral, and there is no minimum per share price requirement for the stock.

Within 24 business hours of sending the information, Equities First determines the capability of executing the loan and calculates a proposed loan-to-value (LTV) ratio and fixed interest rate. Equities First can offer the borrower up to 80% of the value of their stock, and a low fixed interest rate, usually between 3% and 4.5%. By comparison, a typical margin loan offers only up to 50% of the stock's value and higher interest rates, usually 5% - 8%.

After reviewing and signing the stock loan and pledge agreements, the borrower sends his or her securities to one of Equities First's global custodial accounts. Once one of these large banks receive the stock, the borrower is funded within five to seven business days. The use of funds is completely at the discretion of the borrower.

During the loan term, Equities First has a buy/sell relationship with the securities using unique algorithms that trade the securities during the life of the loan. Equities First also has an evolving position where our firm will buy on lows, and we are always ready to return the asset at maturity.

Equities First provides statements every quarter that summarize the interest charge and any dividends to which the shares are entitled. The borrower has the additional option to request the current valuation of his or her pledged agreement at any time during the loan term. During this time period, the borrower makes quarterly fixed interest-only payments.

The stock-based loan is 100% non-recourse. In comparison, a margin loan is full recourse. For example, if the security decreases in value to a certain extent in a margin account, the borrower has to deposit additional money or securities. Since a margin loan is full recourse, the borrower may face fees and penalties if he or she does not deposit the additional funds. With a stock-based loan, the borrower may walk away from the loan with no penalties and no negative credit reporting. If the borrower wishes to ensure the return of the shares, Equities First works with the borrower to tender additional shares or cash.

At the end of the loan term, the borrower repays the loan in full and Equities First returns the same amount of identical collateral. In addition, all stock appreciation over the term is returned to the borrower. The entire process typically takes three years.

Bottom line: Equities First provides better rates, greater flexibility, and a faster transaction when the borrower needs it.

Jeff Smith 

Given today's global market, international exchanges are more accessible to investors than ever before. Since 2010, Equities First has tripled its international loan transactions using non-U.S. securities as collateral. In fact, over 60% of our transactions are made with shares that trade outside of the United States, on exchanges in Hong Kong, Singapore, Australia, the United Kingdom, Canada and Mexico. Most shares traded on non-U.S. stock exchanges are eligible for securities-based loans. With Equities First, international clients are given accessibility to worldwide markets.

Since over 60% of our business is non-U.S., we have deep knowledge of international securities regulations and expertise working globally. Our investment banking partners include some of the top global financial institutions. Working with them enables us to have greater worldwide reach to better serve our international clients.

Our clients come to us from around the globe because of the many advantages they see in obtaining a securities-based loan from EFH. A securities-based loan uses one's stock as collateral for a secured loan. The collateral can be any type of security, whether stocks, bonds or mutual funds. Equities First offers a different type of securities-based loan: a non-purpose loan. A non-purpose loan is a more flexible alternative for individuals who do not want to sell their securities to obtain liquidity.

This type of loan allows greater freedom and the utmost flexibility. With this type of non-purpose loan is also non-recourse. Thus, the borrower is not held liable in the event of a default. The lender cannot seize non-pledged assets or properties, and the borrower has the option to walk away from the loan with no penalties. With a non-purpose loan, there is no limitation on the borrower's use of proceeds, whether it is for expanding a business, paying a mortgage, or personal use.

Our international clients receive the same advantages and quality service for their loans as our U.S. clients. With an EFH loan, borrowers can receive up to 80% loan to value and lower-than-market fixed interest rates. There is no price requirement and virtually all types of securities are accepted. Prior to the inception of a transaction, an individual or institution receives an extensive loan/pledge agreement, which clearly outlines the EFH process. Once an individual presents securities and accepts the terms offered, he can get funded within five to seven business days. A loan term is typically three years. At the end of the loan term, once the loan is repaid in full, EFH returns the identical amount of pledged collateral.

Al Christy 

As you know, it wasn’t too long ago that homes provided many with a deep and seemingly endless pool of loan collateral. Depressed real estate values combined with tight lending standards have taken this option off the table for many homeowners. However, those same consumers are discovering an alternative: securities-based loans.

Securities-based loans make use of stocks, bonds or exchange traded funds as collateral. The most common form of a stock loan is a margin loan, which typically allows you to borrow up to 50 percent of the value of stocks in your account, and a higher percentage for less volatile assets such as Treasury or municipal bonds.

We at Equities First Holdings offer another type of stock loan, called a non-purpose loan, which follows similar collateral rules but carries better rates and terms than a margin loan. While many people are familiar with margin as a way to finance stock purchases with borrowed funds, the loan proceeds from those arranged by Equities First Holdings can be used for virtually any purpose.

Loans provided by Equities First Holdings provide an excellent alternative for people who don’t want to liquidate securities to raise money they need by providing flexible access to the power of a portfolio. And the use of the proceeds is entirely up to the borrower. Stock loans can be used as a short-term financing bridge while a consumer waits for a house to sell, to fund nursing home expenses, or even for emergency situations such as repairing a roof. Proceeds can be used to fund the expansion of a business, for home construction or refinancing a commercial mortgage.

Two heart-wrenching stories, illustrate the broad uses for the proceeds from loans arranged through Equities First. The first involved a family who owned an apple farm. They had exhausted all of their commercial loans and were on the verge of filing for bankruptcy. They needed $3.5 million to keep the farm operating. The family did have a stock portfolio and we were able to arrange the loan they needed, and did so within five-to-seven days, saving the farm.

The other story concerns a husband and wife. She had cancer and their insurance company dropped them. They had access to a portfolio with stock that could not have been used as collateral under most circumstances; however, using that stock as collateral, we were able to get them the much-needed $250,000. This story also has a happy ending as the woman received treatment and her cancer went into remission.

The point: proceeds from securities loans arranged by Equities First offer borrowers’ wide latitude in how they are used. Global institutional investors look to EFH to provide securities-based lending services as a more flexible alternative with significant advantages over conventional margin loans. From individuals with short-term needs for a few hundred thousand dollars to large investment institutions looking for options for their clients to diversify multimillion dollar portfolios, an EFH securities-based loan opens new possibilities in alternative funding for:

• Leveraged buyouts
• Mergers and acquisitions
• Retiring high-interest debt
• Bridge loans
• Refinancing margin accounts, and
• Mortgages – new, refinance, or home equity loans.

Many investors think of margin accounts when they are looking to gain leverage from their investments. However, securities loans are a more attractive alternative because they can offer a higher loan-to-value (LTV) ratio, lower fixed-interest rates, and other significant advantages over conventional margin loans

Jeff Smith 

When deciding to work with a securities-based lender, conducting a thorough due diligence on your lender is critical. Here are five key questions to ask any lender you are considering. Professionals at any experienced firm will be able to answer these questions with confidence.

1. What is your performance like?

   You want to know what to expect from the transaction. Beginning with the term sheet, ask the lender about the process of funding the loan. The lender should give you a step-by-step scenario of how the transaction will unfold.

   How long does it typically take for the lender to provide funding? How often are you informed regarding the interest charge and any dividends that the shares are entitled? And last, what is the course of action taken to return collateral?
    

2. What is your track record?

   A simple question, but one of the most important. A successful lender should have completed a significant number of successful stock loan transactions without a hitch.

   How many stock loans has the lender successfully completed? On what exchanges has the lender completed the transactions? In what countries are the clients based?
    

3. What law firms do you work with?

   The lender's law firm is an integral partner in the transaction. The lender's law firm should possess experience and capabilities in dealing with stock-based lending.
    

4. When the loan is finalized, what firm will hold the shares?

   Ideally, you are looking for a top-of-the-line investment bank that holds global custodial accounts, and has experience in handling securities loans.
    

5. Can I have references?

   Though any lender might tell you what to expect from the process, a former client can tell you what actually happens. The reference should be able to reaffirm the reputation of the lender and the quality of work provided.