What is the difference between a traditional loan and securities-backed line of credit?


Traditionally, if a dealer needed money to expand, or remodel, or acquire new dealerships, they would go out and either have a traditional loan set up with their third-party lending institution, or in our world, in the reinsurance world, they would borrow from themselves inside of their reinsurance company. That has worked terrifically for many dealers for many years, where you don’t have to go out to an outside third-party lending institution and borrow from them. You’re borrowing from yourself, makes perfect sense.

One of the downsides of borrowing inside of your reinsurance company from a traditional standpoint, whether it be required reserves or your surplus assets, is that you’re having to sell your securities investments inside of your reinsurance company. And as we know, with recent down-markets which are a very common place in long-term investment vehicles, you would have to potentially sell at inopportune time to get to your money. That’s one downside. The other downside could be the opposite. You can sell and realize large gains and have to pay taxes inside of your reinsurance company, neither of which are good choices at the end of the day. Many dealers choose to have their long-term financial plans stay intact and they would prefer to utilize this money as collateral to go out and borrow on. Up till this point, we did not have that option, so we are very, very excited to have a lending partner that allows us to collect the surplus assets and utilize that as collateral for a line of credit.

Additionally, one of the benefits that we have from the dealer standpoint is that cash flow is king many times, and what we’re able to offer with this line of credits is interest-only payments. So if we’re looking to borrow money for whatever purpose, again it’s a non-purpose line of credit. It can be used for whatever you want. We can oftentimes use interest-only paybacks which significantly reduces the cash-flow burden.

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