The capital gains rate in 2024 was between 15 to 20 percent, according to the IRS.
And if you’re talking about the largest asset on your balance sheet – your business, those percentages can be substantial.
Here at Consolidated Planning, our planning philosophy focuses on uncovering opportunities, maximizing results, and putting you on a solid path to achieving your post-retirement goals.
In this article we’ll help you understand what securities-backed loans are, how these loans can help avoid capital gains taxes when selling your business, and other benefits that make this an appealing loan type for owners, all to help you decide if this strategy is right for your business.
What Are Securities-Backed Loans?
Securities-backed loans (SBLs) are financing options that allow business owners to unlock the value of their investment portfolios without selling their assets. One of the most significant advantages of SBLs is the potential to avoid triggering those dreaded capital gains taxes. This tool can be particularly appealing for business owners seeking both liquidity and tax efficiency.
How Securities-Backed Loans Help Avoid Capital Gains Taxes When Selling Your Business
Let’s say you’re selling your business for 5M. That’s a big chunk of change that, for the sake of this article, we’ll say you’re getting in its entirety at closing. What do you do with this check now?
Well, fast forward to next tax season, you own capital gains taxes on that 5M. So, ideally you need to keep that money in cash for a while because you know you’ll be writing a check for $1M, for example, on April 15th.
But, what if you didn’t have to let that money just sit in a checking account for that time?
That’s where your Securities-Backed Loans come into play.
Securities-backed loans are a type of borrowing where your loan is secured against your securities such as stocks, bonds, mutual funds, ETFs, or the proceeds from the sale of your business.
With an SBL, a broker-dealer will gladly offer you a flexible loan secured by your $5M. While the loan won’t be 100%, it will be a high percentage of your securities at least covering what you owe in taxes. For this example that number might be $2M and at favorable rates. Prime rate. Plus or minus one.
This loan allows you to keep the full $5M invested, borrow the broker-dealers money for what you owe in capital gains – leaving your full $5M earning anywhere from 7%-10% for the long haul and all you need to do is pay interest to the broker-dealer on that $1M you borrowed to pay taxes. And if you’re earning 2% higher than you’re paying in interest, you’re at an economic advantage with the interest being covered by the interest on your portfolio. You can then either use this to pay the loan down or simply pay the loan back at your discretion.
SBLs are a great option for owners faced with the challenge of deploying newly acquired wealth efficiently without incurring significant tax liabilities. By investing your sale proceeds in a diversified portfolio and leveraging an SBL, you can better access funds for lifestyle needs, new ventures, or other strategic opportunities while allowing the portfolio to grow uninterrupted.
Other Benefits For Securities-Backed Loans For Business Owners
Aside from its tax benefit when it comes to selling your business, SBLs have other notable benefits that may make this type of loan ideal for business owners and their unique situation.
#1 Cost-Effective Liquidity
Since SBLs are secured by assets, they typically come with lower interest rates than unsecured loans, making them a cost-effective way to access cash.
#2 Flexibility in Use
Funds from SBLs can be used for various purposes aside from a large influx of cash from a sale, including business expansion, real estate acquisition, or bridging cash flow gaps.
#3 Portfolio Growth Potential
Because securities remain invested, they continue to appreciate and generate returns, allowing business owners to benefit from market performance.
#4 Quick Access to Funds
The application process for SBLs is often streamlined, providing rapid access to liquidity when needed.
Can You Achieve Your Post-Sale Income Requirements With A Securities-Backed Loan?
A huge part of achieving your post-sale income requirements is understanding exactly how much money you need in retirement AND how to mitigate the amount of capital gains taxes you pay.
Securities-backed loans are a great way for business owners to manage the proceeds from selling their business, offering both liquidity and investment continuity.
To better understand how you can utilize this strategy for long-term wealth-building, talk with a financial professional to review your options.
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Exp. 2/2027
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
This material contains the current opinions of Neal Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
