What is a Stock Loan? How Stock-Secured Loans Work

As the stock market and new asset classes like cryptocurrencies have boomed in the last decade, investors are taking advantage of more stock and crypto loan options than ever before.

Non-recourse stock loans, portfolio lines of credit, and margin lending are all common ways to borrow against equity positions. Portfolio loans, sometimes called a portfolio line of credit, by which private banks lend against a diversified securities portfolio, offer liquidity options for the diversified wealthy. And margin loans are a familiar option for equity investors, accessible even in small discount brokerage accounts.

The issue with many loan products, however, is their general reliance on a diversified or broad portfolio and the lender’s ability to pursue recourse should the portfolio go south.

Non-recourse stock loans, sometimes called share-secured loans or stock-secured loans, are an increasingly popular way to access liquidity without the disadvantages of selling favored or appreciating assets. They work well for large, single-security positions, and these stock loans can come with tax benefits too.

What is a Non-Recourse Stock Loan?

A stock loan or share-secured loan is a type of collateralized financing options that's a common resource for those with sizeable stock positions or cryptocurrency positions. 

By using assets such as equity or cryptocurrencies, you can secure loans with modest interest rates and (sometimes) limited risk. Traditionally, individuals have used these loans to increase access to liquid cash without the sale of an asset. It’s now normal and increasingly common to use stock-backed loans or crypto-backed loans as a means to procure liquidity for personal or business purposes. 

While stock loans have been around for years, the ways they’re done can vary. 

Non-recourse options like those facilitated by GetAStockLoan.com have grown in popularity as a new class of the wealthy emerge, both from market gains in the current decade-long equity bull market, and in the growing body of cryptocurrency and non-fungible-token (NFT) millionaires. The crypto sector has minted a generation of new investors with meaningful gains in cryptocurrency positions. For many, the prospect of selling either isn’t attractive or isn’t realistic considering their involvement: for founders and executives, for example. 

Loans are one way to unlock that wealth without selling.

Non-Recourse Stock Loans 

Non-recourse lending is an attractive way to limit personal risk when seeking out a loan against your stock or cryptocurrencies.

A lender can issue a non-recourse loan against equity shares and other financial assets like cryptocurrencies. The key differentiating factor with non-recourse loans is that lenders have only the intended asset as collateral: they cannot go after other personal assets to make up any shortfall. There is no “recourse.”

With a more traditional portfolio or credit loan, a lender can seek out other assets and even wages in the event that you fail to make payment. Traditional collateral-based recourse loans rely on the underlying asset first, but if the asset falls precipitously in value–as with a portfolio credit line that declines in value– then the lender can pursue compensation for the remaining balance.

What separates non-recourse collateral loans is that the lender is only entitled to seize the designated collateral. In the case of our non-recourse stock loans, that’s limited to the stock or crypto you’ve put up.

If the value of the collateral falls too much for the lender to recoup the value of the loan based on that asset, then they take the loss. This makes non-recourse stock loans intrinsically less risky for the borrower compared to similar collateralized loans, and more risky for the lender.

How Non-Recourse Loans Differ from Other Stock Loans 

There are several differences between non-recourse loans and other share-secured or portfolio-secured loans. 

Portfolio loans like those available from many private banking institutes typically allow recourse for the lender, but manage risk by broadening and diversifying the “collateral” across a portfolio of securities. This reduces the primary risk that a borrower faces when taking out collateral loans, which is that the underlying asset plunges in value. However, equity market crashes can take down many assets at once, so a portfolio loan still may have a greater maximum risk to the borrower (in accessing the borrower’s other assets) than non-recourse loans.

Similarly, margin loans that you may use to take on additional investments are one of the riskiest forms of collateralized loans in that they generally allow for substantial leverage against the collateral.

While these and other collateralized loan products generally aren't mutually exclusive, and a financial product may have hybrid characteristics, non-recourse loans generally let you do whatever you like with the loan and they’re available even for highly concentrated single-stock positions. 

Benefits of Non-Recourse Loans

  • Reduced collateral risk; failing to repay the loan only results in the loss of the asset you've collateralized, even if the lender takes a loss. 
  • Convenient, accessible liquidity without having to sell an asset that you expect to grow in value or cannot logistically sell, such as business owners or equity holders in public stocks.
  • Ability to borrow against single positions rather than larger portfolios.
  • Depending on jurisdiction, some borrowers may be able to gain liquidity without opening themselves to capital gains taxes on the asset sale, which can be much more substantial than interest payments.

Disadvantages of Non-Recourse Loans 

  • Lack of diversification: because non-recourse loans are often secured by a single stock or cryptocurrency position, they are more vulnerable to declining single-asset values and stock market crashes than portfolio loans that contain more diverse holdings. 
  • Potentially increased interest rates or lower loan-to-value amounts than portfolio lines of credit to compensate for a lender’s additional risk compared to recourse loans. 

Why Use a Non-Recourse Stock Loan

Compared to other loan options, the non-recourse stock loan fills a unique position for borrowers. Non-recourse loans have several use cases that are increasingly relevant to the borrowers of today. 

Generating Liquid Cash from Large, Single-Stock Positions

Traditional portfolio loans aren’t an option if you want to capitalize on a large, single-stock or single-cryptocurrency position without an outright sale. For instance, executives, founders, and business owners with modest income or largely stock-based compensation are sometimes asset-rich but cash-limited. For these owners, liquidity events are not always expected in the short-term, and these individuals are often limited in their ability to access cash.

Non-recourse loans are a great option, allowing access to liquidity based on these positions without the optics of a sale, and depending on jurisdiction, without the same regulatory requirements as an insider’s public stock sale.

We find that cryptocurrency owners, in particular, are often averse to selling large positions due to their long-term belief in the utility or appreciation potential of a token or decentralized tool. In these cases, non-recourse loans offer liquidity without a sale and peace of mind for those with high-conviction positions but cash needs at the same time.

Potential Tax Benefits

Borrowing against a position rather than selling it can also be advantageous from a tax perspective in certain jurisdictions. Selling equity can incur substantial capital gains. 

Since loans aren't considered taxable income in many jurisdictions, the borrower need only pay back principal and interest rather than the higher taxes that would accompany multimillion-dollar asset sales. In America, the wealthy are taking advantage of this at high rates, with a “buy, borrow, die” mentality due to the step up in basis that inherited assets undergo at an owner’s death.  

Oracle CEO Larry Ellison famously took out a $10 billion credit line against his own equity, and Elon Musk had pledged 92 million of his own shares, which were worth about $50 billion in 2021, as collateral for personal loans.

Getting a Loan Against Your Stock Position 

With traditional margin loans, the risk is always there that your asset sees a dramatic drop in value that forces a lender to sell your collateral and pursue your other assets. 

A non-recourse loan can shield you from the worst of these fallout events. 

More importantly for many, non-recourse options give insiders, founders, or executives flexibility over time if you need access to cash but have only illiquid assets.

GetAStockLoan.com helps borrowers connect with lenders who can close on loans fast and in most jurisdictions. Our approach offers flexibility for those who need cash but aren’t prepared to, or simply can’t, sell their appreciated stock or crypto assets. Our process is fast and convenient; funds can be delivered in most jurisdictions globally; and we can lend against most public equities and most of the popular cryptocurrencies worldwide.

Click here to get started on a stock or crypto loan today.