Consider securities when funding company growth

Global Dynamics International Inc. is the fastest growing privately held company in Michigan, according to a study sponsored by The Detroit News and the local CBS-affiliated radio station. A full-service information technology consulting firm based in Ann Arbor, Global Dynamics is tripling its size this year, according to Bhushan Kulkarni, the company's president and chief executive officer.

When Kulkarni began looking for financing to sustain the growth of his 6-year-old company, he ruled out several traditional sources. He didn't want to rely on venture capital and risk giving up some control over the company. A loan based on receivables alone didn't appeal to him due to high growth rate, nor did he want to liquidate any securities to gain access to cash.

"A company such as ours in a fast growth mode should have all its resources available," he says. "I didn't want to have my back up against the wall," Kulkarni said.

Instead, Kulkarni's financial consultant suggested that a securities-based loan might be a more cost-effective financing option. Kulkarni pledged the securities in his personal and business portfolios to secure a $1.8 million line of credit.

"I like the stability of having my securities intact, and my investments continue to generate a return that can offset the cost of the financing."

Securities-based financing

Securities-based financing allows you to borrow up to a certain percentage of the current market value of eligible securities in your personal or business portfolio. Percentages vary with different lenders and lending programs, but you may be able to borrow from 50 percent to 95 percent of the securities. Eligible securities might include stocks, bonds, mutual funds, treasuries or certificates of deposit.

The benefits of securities-based financing are many:

You can retain the potential appreciation of your assets.

You may be able to keep your current investing plan and strategies on track.

You defer the capital gains taxes that may otherwise be due when you liquidate securities.

Because your loan is secured, your interest rate may be very competitive perhaps much lower than credit card or unsecured loan rates.

The interest expense may in certain cases be tax deductible.

Securities-based financing may be used for a variety of business purposes, including the purchase of another company or division, buying equipment and acquiring land or real estate. You may be able to borrow more than you could with a loan based on inventory or receivables, particularly if market returns of the past few years have substantially increased the value of your personal or business holdings.

How it works

Generally, to establish a securities-based loan you deposit the assets you are borrowing against into a securities account pledged to, and under the control of, your lending institution. Any dividends, interest or capital appreciation continue to accrue for your benefit.

The loan documents governing a securities-based loan require that the securities in the pledged account maintain a minimum aggregate value, commonly referred to as a maintenance requirement. Should the value of the securities pledged as collateral decrease below the maintenance requirement, the deposit of additional assets or the liquidation of assets may be required. With some programs, you may be able to buy and sell securities in the pledged account, as long as your portfolio retains the required collateral value.

The best programs will allow you to tailor a securities-based loan to meet your business or personal needs. You should be able to choose from either fixed or variable interest rates. Loans may be structured as term financing or credit lines, and some lenders offer flexible repayment schedules, including interest-only payments (with principal due at maturity) or interest-and-principal payments.

An attractive alternative

In certain cases, as Kulkarni discovered, securities-based financing can be an attractive alternative to liquidating assets or other sources of capital when you want to finance new business needs. Talk with your financial consultant and your tax adviser about whether the securities in your portfolio could secure a loan for your business.

(John Qua is a senior vice president and director of Business Financial Services for Merrill Lynch.)