Sources of Liquidity That You Should Have
Proactive liquidity management allows for more flexibility when approaching purchases.
What access do you have to the different forms of liquidity (credit card, cash, home equity line of credit)?
Do you need another line of credit? Credit can be a positive thing to have because it creates more options and flexibility. This flexibility is important to have just in case of emergencies and you need protection.
Consider having access to a credit card, cash, a HELOC – and a securities based line of credit
More Options Mean More Flexibility
The pros to having a securities-based line of credit are no startup fee, no ongoing fees, and no obligations to ever use it. But it does give an extra option if you were to ever need credit.
Being proactive about liquidity requires you to have solutions for any problems that you may face in the future. This gives you more options to decide on the best solutions based on your goals, timeline, and current rates.
Which To Use?
Some action plans may be easier to choose from compared to others.
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%?
- Line of Credit: has a lower rate and costs 10% less.
- What if I plan to pay the purchase off in 20 days?
- Credit Card: there is no interest due until the first payment. Unlike a credit card, a line of credit interest starts from the day funds are drawn.
- What about large purchases?
- The size of the loan will determine this answer
- If you need $200,000 to buy land and with a credit card limit of $30,000, only your securities-based line of credit may be large enough or provide enough liquidity.
- The size of the loan will determine this answer
Ambiguous:
- 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%)?
- Credit cards are not useful. Either the securities-based line of credit or the home equity line of credit would work.
- Your financial advisor can provide more insight on this option.
- Credit cards are not useful. Either the securities-based line of credit or the home equity line of credit would work.
Other Considerations
You need to be informed and aware of your lines of credit, they may not be there when you need them during emergencies. For example, moving can stack up payments and bills, it can also complicate timing issues for purchases and sales of a home. Very rarely you can purchase and sell on the same day, especially for higher-net-worth families.
One who borrows must repay the home equity line of credit with the sale of their home. HELOC can’t be set up till after moving. You have to be careful because timing is important to have funds easily accessible. Security-based line of credit might be your only solution in this case.
During a 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 readily available liquidity solutions.
The power of liquidity comes down to what you have access to, what you need to accomplish, and the timing you to have to meet. The more tools you have access to, the more potential cost savings you can have. You will become more flexible in options.
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.