Has Anyone Used a Security-Backed Line of Credit?

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September 14, 2025

by a searcher from Duke University - The Fuqua School of Business in New York, NY, USA

Has anyone used a security-backed loan to fund their equity check on an SBA Loan? Would that ever be sensible and how should I think about the pros/cons? For example, if I parked $1mm into a high-yield money market account to fund the equity check on an acquisition loan, I could either … A) sell the securities to fund the down payment or B) take a loan against those securities and use those proceeds to fund the down payment. I understand the view that additional leverage is risky, but ultimately that $1mm is either going into the deal (scenario A) or have a lien from the PG (scenario B). Free money right.
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Reply by an investor
from New York University in New York, NY, USA
Why would you take a pledged asset line that will today cost 7-8% against a high yield MMF that probably pays 4-5%? You’re getting a negative arbitrage on this. How are you going to fund that spread, especially if year 1 at the business isn’t great? Also - while you are keeping that $1mm outside of the business, it isn’t liquid - if you sell the MMF it will need to go against the line. If you are taking the line against an equities portfolio because you have conviction that the market is going up, that’s a different story, but very risky. First off, you are going to need to fund the interest on the line and might not get cash flow from the business. If the market crashes and the value of your portfolio drops significantly, you will get a margin call so will either need to deposit more cash / securities, pay down the loan, liquidate some of the pledged assets, etc. Not a fun situation to be in.
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Reply by a searcher
from Drexel University in Long Island, New York, USA
If I'm understanding correctly, your only objective with using the Securities-backed LOC is to provide additional leverage. I believe this will actually have the opposite effect. These lending products are fully-collateralized. In fact, over-collateralized. Meaning, the size of your LOC will only be about 60% - 95% the value of the collateral; depending on the specific securities, and only exceeding ~70% when the collateral is cash-like deposits (like in your hypothetical). Utilizing a Securities-backed LOC might make sense when someone wants to avoid liquidating securities due to tax implications or due to their opinion on market direction. What am I missing?
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