Getting a Margin Loan

Securing a margin loan can mean quick cash for startup, but it doesn't come without risk.
Magazine Contributor
2 min read

This story appears in the November 2007 issue of Entrepreneur. Subscribe »

Question: I'm thinking about borrowing against my securities to open an art gallery. What are the pros and cons of using a margin loan to finance a business?

Answer: Unlike applying for a business loan from a bank, borrowing against your stocks, bonds and other securities can be a quick and easy way to get startup money. There is no business plan to present, no mountain of paperwork to fill out and no credit check to pass. Assuming that you have at least $2,000 in cash or securities in your account, your brokerage firm will typically lend you up to 50 percent of the value of most stocks, mutual funds and other widely traded securities at rates that are often lower than you'd pay for a loan from the bank. For example, if you own $100,000 worth of Microsoft, your broker will generally allow you to borrow $50,000 on margin. And the interest is usually tax deductible.

A downside, of course, is that any time you borrow money to start a business, you run the risk that your company may not produce enough cash to service your debt. Should you find yourself unable to repay the money you borrowed, your broker would be forced to sell some or all of your shares to satisfy your debt.

Borrowing against your stocks and other securities carries another risk. If the price of your stock declines, your broker may ask you to deposit additional funds in your account, which is known as a margin call, to maintain the firm's minimum margin requirement. If you can't come up with the necessary money in time, your broker will liquidate your securities, possibly triggering losses and unfavorable tax events.

"Borrowing against your stocks, bonds and mutual funds to capitalize a new business can be a viable option," says Kenneth Shapiro, a wealth management advisor at Merrill Lynch and a former entrepreneur, "but it's not without risk."

Rosalind Resnick is the founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses. She can be reached by e-mail or through her website.

loading...
More from Entrepreneur
Our Franchise Advisors will guide you through the entire franchising process, for FREE!
  1. Book a one-on-one session with a Franchise Advisor
  2. Take a survey about your needs & goals
  3. Find your ideal franchise
  4. Learn about that franchise
  5. Meet the franchisor
  6. Receive the best business resources
Save on an annual Entrepreneur Insider membership through 5/8/21. For just $49/yr $39/yr, you’ll enjoy exclusive access to:
  • Premium articles, videos, and webinars
  • An ad-free experience
  • A weekly newsletter
  • Bonus: A FREE 1-year Entrepreneur magazine subscription delivered directly to you
Discover a better way to hire freelancers. From business to marketing, sales, finance, design, technology, and more, we have the freelancers you need to tackle your most important work and projects, on-demand.

Latest on Entrepreneur