Share Financing vs Margin Loans

Margin Loans and Share Financing are two different structures designed to free up liquidity. Both paths to liquidity have their place in leveraging assets to create greater wealth. In small capitalization stock situations, Share Financing has a leg up on Margin Loans.

One consideration is stock price. According to the TD Ameritrade Margin Loan handbook, which happens to be one of the largest brokers in the world, “non-marginable securities, (are) equities trading under $2.50.” It is very common for small cap issues to have low prices, so the assets in these brokerage accounts are not able to be fully utilized. The assets provide the owner with no liquidity. The assets do not continuously work for the owner. The assets sit idle, in violation of the cardinal rule that assets must continuously be deployed to make more money for the owner. Idle assets are wasting assets. All successful entrepreneurs understand this cardinal principle.

A consideration for leveraged stock holders is transparency of the Margin Loan or Share Financing. It is quite common, especially for Hong Kong traders, for securities firms to put clients in a risk-based margin system. This system dynamically evaluates a portfolio to set margin requirements. With this in mind, margin requirements may fluctuate, and stock holders can lose more than their account’s value. As a result, additional capital can be requested at any time to maintain a position. If an account violates these rules, the liquidation algorithm will select an asset to sell in order to raise cash. Users in this system can only set a preference to “liquidate last” on a best efforts basis, and forced sales can be marked at disastrous prices, especially in the instance of a market correction. Accounts are at the mercy of a black box algorithm.

In traditional Margin Loan transactions, not only is the margined stock at risk of total loss, the stockholder’s other assets are likewise at risk of forced sale at bargain basement prices.

There is a reason why sophisticated entrepreneurs set up multiple corporations for each of their investments. The sophisticated entrepreneur knows it is foolhardy to expose all of their assets to the potential contagion of a single transaction gone bad which, in turn, can sink all of the entrepreneur’s assets.

Worse yet, if the stock  account balance after the fire sale to meet the margin call is insufficient to cover all of the obligations of the account holder, brokers can, and often do, pursue seizure of the entrepreneur’s other assets not in the brokerage account.

Share financing from Squadron is fundamentally different. The nature of the financing from Squadron is structured from a non-recourse foundation. Meaning that in the event of a default, the entrepreneur has the ability to walk away with no further obligation to Squadron. This feature puts the risk-reward ratio in favor of the entrepreneur, for Squadron cannot request additional funds or shares even if the stock price collapses and the market value does not cover the amount initially advanced to the entrepreneur.

While Share Financing, whether traditional Share Financing, or Squadron’s unique proprietary model, is certainly advantageous in many situations, traditional Margin Loans, if available, are preferable in other situations. Margin Loans for example are great for blue chip equities that are actively traded. But when dealing with international or emerging market stocks, complexities often arise. For example, in some instances, these stocks are held at 100% margin. In other instances, Margin Loans simply are unavailable.

Perhaps the most meaningful advantage Squadron Share Financing has over traditional Margin Loans is the additional flexibility that is provided to the entrepreneur. Margin Loans often must be kept in-house by the lending broker – meaning that any additional buying-power via margin must be used to trade securities within the brokerage platform. Squadron on the other hand, structures funding to allow entrepreneurs to use proceeds for other business purposes. There is no requirement to purchase additional stocks and to hold that stocks “in house”.

Squadron has the ability to quote funding for stocks that trade on 16 different exchanges around the world, from Hong Kong to Frankfurt. Send us a “Request for Quote” and receive a response in less than 24 hours to find out more!