Because liquid, public stock is an acceptable form of collateral, it can easily be used for both business and personal loan guarantees against the unlikely event of default. A founding shareholder of a public company may wish to secure a large, personal loan against the value of the public stock. What for? Whatever he or she deems is personally beneficial. Such a loan could help to supplement needed or even frivolous expenses. What follows are some of the benefits and downsides of loans against the value of public stock.
No Personal Guarantees
Unlike a typical collateralized debt obligation on an individual, a public stock loan that works against the value of your company’s public stock is non-recourse. Wikipedia has a great article on what it really means to have a non-recourse loan. This is very similar to the type of lending that occurs with self-directed IRA investing where the arms-length characteristic of a deal bars the lender from extracting any blood directly from the borrower. In other words, the loan is, in most cases, 100% dependent on the
There is really only one downside. If for some reason the borrower is unable to make the regular loan payments or otherwise defaults on the loan, the lender may exercise his/her option to take the collateral–your company stock. If your loan is substantial and your holdings in the public company stock are substantial, then the hit could be detrimental to one’s net worth. If you’re able to keep up with your debt obligations, then upside possibilities of such a loan can be substantial, providing expenses for living now. They’re particularly helpful if the value of your public stock continues to rise, making the loan to value ratio of the stock, even lower.
Keep in mind, such obligations are typically only available to founders or those with significantly large ownership in the company’s stock. Such loans are reminiscent of loans provided to the company directly. And, while such loan amounts are typically smaller than that allotted to the company, they can be much more substantial and personally safe for the borrower, protecting them from any personal liability against future payments. This is particularly helpful, especially if the need for money outweighs any of the potential risk involved.
We’ve a number of partners that provide these types of loans against the value of your public company stock. For years this market was a dispersed and eclectic mix of players and rightfully so. It caters to a very small and very typically flighty niche. But the right lenders love these types of loans.