When Dr. Debra Zelinsky decided to buy an office condo in the Chicago area to expand her flourishing neural-optometry practice early this year, she faced a dilemma. After all, the credit crunch had hit, making it tough to get loans, and she was reluctant to sell her stock holdings to raise cash when the equity markets were in a downward spiral.
"I had been planning the expansion for about six months" and didn't want turn back, Dr. Zelinsky said. "We had outgrown the smaller location and needed a larger facility" with more than double the space, she said.
Then a banking friend told Dr. Zelinsky about a stock loan program offered through Chicago Bancorp. Under the program, run by Equities First Holdings LLC of Indianapolis, she received a three-year loan for 80% of the value of her stocks, with a 3.5% interest rate. Nowhere else could she get a loan so cheaply, Dr. Zelinsky said. "And the nicest part of it is that in three years, I will have a windfall" if the stocks have appreciated when the term ends, she said. If her stocks tank, Dr. Zelinsky has the right to keep the loan and walk away from the stock without owing the lender a dime.
She is among a growing number of investors seeking out the offbeat program. Demand has been particularly strong over the past four months, said Al Christy, founder and chief executive of Equities First.
Basically, the program allows cash-strapped investors to use their battered stocks as collateral to access low-cost loans for up to 80% of the stock's value.
The loans carry rates of between 3% and 5%, with terms ranging from two to 10 years. There are no credit checks or in-come verification requirements, and the investor has the option of walking away from the stock at any time and simply keeping the cash from the loan without further obligations.
NOT RISK-FREE
But the low-cost loan isn't without risk. If the stock tumbles another 20% from the loan's discounted value, the borrower must cough up the extra cash to make up the difference or lose the shares.
Financial advisers say the program appears to give investors cash at a time when home equity loans have dried up and selling stock would lock in losses in today's decimated equity markets.
"It's a very good alternative for certain uses for certain people, especially at the low interest rate," said Geoffrey VanderPal, a certified financial planner at Elite Financial Planning Group of America Inc. in Las Vegas, which manages more than $100 million in assets. "They get the money they need while retaining that stock for the future."
However, Mr. VanderPal cautions investors to check out the lender's track record, legal counsel, accounting firm and references before signing up, to ensure that the company is reputable and trustworthy. "You can also check with the SEC and [The Council of] Better Business Bureau[s in Arlington, Va.] to see if any complaints have been lodged," he said.
Grander Financial Inc. in Irvine, Calif., is the latest entity to start offering the Equities First program, through its My Equity Freedom Securities initiative. Other entities offering stock loan programs in-clude Rainmaker International Inc. in Savannah, Ga., HedgeLender LLC and Global Stock Lending, both in Philadelphia, and AmeriFund Capital Finance LLC in Boca Raton, Fla. Some fund the loans themselves, while others rely on hedge funds for financing.
Terms vary from program to program. Some require minimum investments of $20,000, while others start at $100,000. Some offer loans of up to 90% of the stock's value, but these often contain caps that limit the amount the investor gets if the stock skyrockets during the term of the loan.
Others, such as Global Lending, charge higher interest rates — currently about 8% — but the borrower has the freedom to take back the shares at any time instead of having to wait until the term ends. Some companies, such as AmeriFund, charge points or fees at closing time.
Interest in the programs has soared as the equity markets have tanked.
Demand has been particularly strong among people wanting loans to buy real estate on the cheap, said Roel Hoekstra, director of institutional services at HedgeLender since 2001 and founder of recently launched Global Stock Lending.
Rainmaker, which doesn't advertise, said: "[We have] more business than we can handle."
However, investors need to ask a lot of questions and read the fine print, financial advisers warned.
Indeed, the credit crisis has prompted a raft of dubious stock lenders to start setting up shop in the hopes of preying on the naive and gullible. The FBI and Securities and Exchange Commission have charged at least one company, One Equity Cos. of Westerville, Ohio, with fraud. This company did business under a number of names, including One Equity Corp., Triangle Equities Group Inc., Victory Management Group Inc. and Dafcan Finance Inc. — all of which were all listed in the July 10 U.S. District Court complaint.
The SEC alleged that the owners, Michael Spillan and his wife, Melissa, had sold the shares as soon as they received them from customers, paid themselves over $1 million in salaries and did not keep cash reserves to repurchase and return the shares to borrowers who repaid the loans.
Mr. Hoekstra urges investors to ask questions, conduct background checks and verify companies' funding sources before signing on. "You're not dealing with a bank that's [Federal Deposit Insurance Corp.-]insured or a brokerage firm that has [Securities Investor Protection Corp.] insurance; you're dealing with a private-finance company, and nobody is going to bail you out," he said. "You need to do your homework."
E-mail Janet Morrissey at [email protected].
