For shareholders of publicly traded companies, equity often represents both wealth and restriction. While these holdings may be worth millions on paper, they can be difficult to access as liquid capital. Selling shares is not always ideal, as it may trigger tax events, signal insider activity to the market, or conflict with long-term strategic interests. In this context, we explore stock loans an effective alternative that allows shareholders to unlock liquidity from their equity holdings without giving up ownership or control.
A stock loan is a type of collateralized financing where the borrower pledges publicly traded shares in exchange for cash. Unlike a margin loan, which is typically full-recourse and managed through a brokerage, stock loans are usually structured as non-recourse, fixed-term loans. These structures allow shareholders to retain beneficial ownership while unlocking the liquidity tied up in their equity positions.
The practice of borrowing against securities has its roots in the early 20th century, when wealthy individuals began using their stock portfolios as collateral to access credit. Initially limited to a niche practice among ultra-high-net-worth families, securities-backed lending gradually evolved alongside the growth of modern financial markets. By the latter half of the 20th century, the expansion of private banking and wealth management services led to more formalized lending structures.[1] In the 1990s and early 2000s, advances in custodial technology, regulatory clarity, and rising equity markets contributed to the wider adoption of stock loans as a tool for liquidity and portfolio management. Today, stock loans are a global financing solution used by founders, executives, and family offices to unlock the value of their equity holdings without triggering a taxable event or relinquishing ownership.
There are two primary ways stock loans are structured. The first is through a pledge agreement, in which the borrower retains legal title to the shares. In this setup, the shares are typically moved into a segregated custodial account under the borrower’s name, and the lender holds a lien on the shares. If the borrower defaults, the lender has the right to seize and liquidate the shares but cannot pursue further claims.
The second structure is a title transfer agreement, in which legal ownership of the shares temporarily passes to the lender. Upon repayment, equivalent shares are returned to the borrower. This setup provides the lender with more flexibility but may introduce different legal or tax considerations for the borrower.
Stock loans generally follow common market conventions, regardless of structure. One key concept is the loan-to-value ratio, often called LTV, which determines the maximum borrowing amount relative to the value of the pledged stock. For example, if your shares are worth $10M and the LTV is 60%, you can borrow up to $6M. Most stock loans offer LTV ratios between 40% and 70%, depending on trading volume and price stability.
Interest rates are typically fixed, between 3% to 7% per year, or floating, based on market benchmarks such as the Secured Overnight Financing Rate (SOFR), with an added spread of 2% to 3%, with payments made quarterly. Some loans have a fixed repayment period, typically ranging from 1 to 4 years, while others may be open-ended, depending on the lender’s policies. In some cases, early prepayment may be restricted or subject to approval, depending on the terms of the agreement.[2]
The shares used as collateral must be publicly traded, often listed on major exchanges such as NASDAQ or NYSE, and usually must be free-trading. The collateral value is often based on a short-term average, for example 3-day average closing price. Borrowers frequently retain upside participation and, depending on the agreement, may also keep dividend rights and voting power. Fees may apply, typically 2% to 5% upfront. Loan funding is typically released after electronic transfer of shares into the lender’s designated account.
Borrowers turn to stock loans for several reasons. First and foremost is the ability to access liquidity without triggering a sale. This is particularly important for insiders who are subject to blackout periods, Rule 144 restrictions, or who wish to avoid market speculation about insider selling.
Second, stock loans can offer tax efficiency. In many jurisdictions, borrowing against appreciated securities does not trigger a capital gains tax event, allowing the borrower to defer or potentially avoid tax liabilities that would result from a sale.
Third, the non-recourse nature of most stock loans provides downside protection, if the stock value falls below the loan amount, the borrower can forfeit the shares with no further obligation.
Beyond individual benefits, stock loans are often used in corporate and estate planning strategies. For example, founders may use the proceeds to invest in other assets or manage liquidity during lock-up periods, while family offices may incorporate stock loans into trust structures or wealth transfer strategies. The flexibility in fund usage makes these loans particularly attractive to those with concentrated stock positions but diverse capital needs.
Despite their benefits, stock loans are not without risks. A significant drop in the stock’s value may lead to forfeiture of shares if the borrower is unable or unwilling to repay. Some lenders may impose restrictions on refinancing or early repayment, especially during the first 12 to 18 months of the loan.
Illiquid or volatile stocks may qualify only for lower LTV ratios or stricter loan terms. Additionally, if the loan is structured as a title transfer, there may be uncertainty regarding dividend entitlements or voting rights. As with any financial product, the terms of the contract and the reputation and strength of the lender are critical to review carefully.
To better understand the benefits of stock loans, it is useful to compare them to margin loans, another common method of borrowing against securities. A margin loan is a credit facility offered by a broker or financial institution that allows investors to borrow funds using their existing shares or managed funds as collateral. Depending on the type of securities held, borrowers can typically access an LTV ratio of up to 70%. However, margin loans are full-recourse, meaning the borrower is personally liable for repaying the entire loan, even if the value of the collateral drops significantly.
A key feature of margin loans is the margin call. If the value of the portfolio declines and the LTV exceeds the allowable limit, the borrower must add cash, pledge more securities, or sell assets to reduce the loan balance. This makes margin loans highly sensitive to market fluctuations. Interest rates are usually variable, and the structure is often suited for short-term borrowing rather than long-term liquidity planning.
In contrast, stock loans are typically non-recourse. The borrower pledges publicly traded shares as collateral, but if the stock price falls and the loan is not repaid, the lender can only claim the pledged shares, with no further liability to the borrower. Stock loans usually carry fixed interest rates, are structured over longer terms, and are not subject to margin calls. They are especially suitable for shareholders with large, concentrated equity positions seeking liquidity without triggering a sale or public disclosure.
Unlike margin loans, which are standardized and executed through brokerage accounts, stock loans are custom-structured through legal agreements and may involve custodial arrangements or private banking channels. While setup can take more time, stock loans offer borrowers greater privacy, flexibility, and downside protection.
Stock loans offer a powerful and flexible financing solution for shareholders looking to unlock the value of their equity holdings without triggering a sale, giving up ownership, or signaling insider activity. Whether structured as a pledge or a title transfer, stock loans provide liquidity with privacy, long-term stability, and tax efficiency, making them especially attractive to founders, executives, and long-term investors with concentrated stock positions.
As with any financial strategy, it is important to evaluate the risks, understand the terms, and work with professionals who can structure the right solution. ARC provides custom stock loan solutions designed to meet the specific needs of shareholders across global markets. Reach out to us to learn more.
References
[1] Aeon River Ventures (2024): History of Securities-Backed Lending & Modern Trends
[2] Disclaimer: Loan terms such as interest rates, LTV ratios, fees, and repayment periods vary by lender, borrower profile, and market conditions. This information is for illustrative purposes only and does not constitute a binding offer or financial advice.
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