Lesson 10 of 20 · 6 min

Typical minimums across the market

Minimums cluster in bands, and the band you fall into changes the terms more than the rate.

Minimums matter for a reason beyond access. The band a borrower falls into determines who they are dealing with, how much of the agreement is standard form, and how the eight terms are administered in practice.

The bands, described generically and without naming any provider:

Below roughly $100,000 of pledged assets: generally served by margin rather than by a dedicated line.
Roughly $100,000 to $500,000: entry-level lines from brokerages, standard-form documents, published advance rate schedules, tiered rate cards, minimal negotiation.
Roughly $500,000 to $5,000,000: the main market. Relationship pricing appears, spreads narrow with balance, and some terms become discussable.
Above roughly $5,000,000: private banking territory. Bespoke documents, negotiated advance rates, and occasionally a committed rather than demand structure at a higher price.

Minimum draw sizes are a separate constraint from minimum asset levels. A facility may require a first draw of a stated amount, which forces a borrower who wanted modest access to carry more debt than intended — and therefore less headroom than intended, since headroom is set by the draw.

The observation worth carrying from this lesson is that the terms most worth negotiating are usually not the rate. Between two facilities, a difference of fifty basis points on $300,000 is $1,500 a year. A difference of ten points in the maintenance threshold changes the forced-sale multiple, and a difference in whether advance rates may be revised changes whether collateral value is stable at all. Those are worth more than the spread and are discussed far less.

Key terms

Minimum pledged assets: The asset level a provider requires before offering a dedicated line. Clusters in bands across the market.
Minimum draw: A required initial borrowing amount. It sets a floor on the balance and therefore a ceiling on headroom.
Relationship pricing: Spread reductions tied to total assets or products held. Appears in the middle bands and above.

Worked example

Fifty basis points against ten points of threshold

Two facilities on a $600,000 portfolio with a $300,000 balance.

Facility A: rate: 6.85%
Facility B: rate: 7.35%
Facility A: threshold 65%: Trigger $461,538, headroom 23.1%
Facility B: threshold 75%: Trigger $400,000, headroom 33.3%
Facility A: forced-sale multiple: 2.86×
Facility B: forced-sale multiple: 4.00×

B costs $1,500 more a year, gives ten more points of headroom, and makes a cure 40 percent more expensive when one is needed. Illustrative terms, not offers.

Check yourself

Facility A charges 6.85% with a 65% threshold; Facility B charges 7.35% with a 75% threshold. What does the higher threshold buy and what does it cost?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.