How strategic borrowing can keep your investment strategy on the right path

N o matter how carefully you’ve planned your finances, the time may come when you need a large sum to meet an unexpected, major expense – buy a piece of real estate, pay a large tax bill or help a child finance an entrepreneurial dream – and you don’t have the cash on hand. That is the time to sit down and discuss your options with an experienced ally – your UBS financial adviser.

Staying on course

Consider the case of a business executive who suddenly found herself facing a $10 million tax bill. The most direct way to raise the cash was to sell shares of her company where most of her wealth was concentrated. Yet she quickly realized this approach posed serious drawbacks. Because those shares were worth much more than when she had acquired them, selling would have subjected her to sizable capital gains taxes. Moreover, having fewer shares would dilute her voting rights in the company and impair her ability to benefit financially from its future growth.

Working with her UBS financial adviser and a UBS wealth management banker, this executive explored another approach: using her shares as collateral for a securities-backed line of credit, a loan that she could use to finance this tax bill. With this approach, the executive had a plan to repay the loan that worked comfortably with her income stream, spending needs and overall financial goals. The loan enabled her to fund the tax expense, hold onto her shares and maintain her voting rights in the company.

For that executive, or any investor hoping to maintain a long-term investment strategy by borrowing against the value of their eligible assets, a benefit of securities-backed line of credit is that “you keep your investment strategy intact with the asset allocation you’ve chosen,” says Trisha Knake, head of SBL & Accounts Product Management for UBS. You meet a temporary liquidity need and continue to pursue your long-term goals.

A securities-backed line of credit should not, however, be confused with margin account. While both use investment assets as collateral, a securities-backed line is a "non- purpose" loan, which means it can be used for any purpose except buying, carrying or trading securities.

On the other hand, a margin account is considered a "purpose" loan and may be used to purchase securities.

Interest rate advantages

Because a securities-backed line of credit is a LIBOR-based loan, it may offer lower interest rates than a conventional loan tied to the prime rate, Knake adds. And while applying for a bank loan could take weeks to process, “you can generally get a decision on a securities-backed line of credit in a few days,” said Knake.

It all starts with a conversation

Your UBS financial adviser and your tax specialist can help in the review of flexible financing options. Despite the potential advantages of a non-purpose securities-backed line of credit, borrowing against securities (as with any type of borrowing) entails risks that you should consider carefully. A securities-backed line of credit may allow you to keep your investments on track even as you meet short-term liquidity needs.

Discuss your financial situation and your long- and short-term goals with your UBS financial adviser.