Commercial Loan: Stock Collateral

I was asked today if a commercial loan could be secured with corporate stock. Lenders often will use securities of various kinds as collateral for their loans. Borrowers should be prepared with the following.

  1. Is the stock publicly traded? Which exchange?
  2. Are there any restrictions on the stock?
  3. Are the securities professionally handled by a third party?
  4. Stock certificates may need to be provided.

Borrowers should know the following.

  1. You will not get $1 for $1 value as collateral. Because the value of a stock can change significantly, lenders use a formula when using advance ratios for collateral.
  2. Often times it is easier to use your securities as collateral with the bank who holds the securities. If you obtain a commercial loan from a different bank than who holds your stocks, don’t be surprised if the lender asks you to move your stocks to their investment group.

Using securities as collateral is a great way to encourage a lender to issue your commercial loan. Although stocks, bonds and other securities are not as liquid as cash, they can be a very good collateral source. If you are required to move your securities to the lender’s financial institution, the lender will take comfort in a larger banking relationship with you as their client.

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