How to Get a Travel Visa, and Where You Need One

Sometimes, travel involves more paperwork than just your passport and boarding pass. Travel visas are documents that grant you the privilege to travel to a given country. Depending on where you’re coming from, where you’re headed, and why, you may or may not need a visa to get there — but it’s important to find out whether you do as part of your travel planning.

If you need a visa, you’ll have to apply for one with the country you’re planning to visit. What’s more, the application will likely come with a fee.

To help you figure out the wide world of visa requirements, read on, and learn:

•   What the different types of travel visas are

•   Which travel destinations require a visa

•   How to get a visa

•   How long it takes to get a visa

Types of Travel Visas


While there are dozens of visas available for different purposes, they can be broken down into four categories: tourist, immigrant, student, and work.

•   Tourist visas are for travelers visiting a country for a short time. This is most likely what you’re looking for if you’re planning a vacation. Some countries don’t require United States citizens to apply for this type of visa ahead of time, but there may still be restrictions that apply to your travel.

For example, as long as you have a valid U.S. Passport, you can travel to most parts of Europe without applying for a visa beforehand. But you can only stay within the borders of the Schengen Zone for 90 out of 180 consecutive days. The passport stamp you receive on arrival is your visa. (The Schengen Zone encompasses most of the EU countries, some Scandinavian ones, and a few others.)

•   Immigrant visas are for people who are hoping to establish permanent residence in their destination country. Applying for this type of visa can be a lengthy, multi-step process, and getting a visa doesn’t guarantee you’ll be granted citizenship. Still, it’s an important first step toward emigrating to a different country.

•   Student visas are for those studying in a foreign country. To apply for one, you’ll need to prove that you’re enrolled in a legitimate, qualified school in the destination country.

•   Work visas allow their holders to accept employment in a country outside of their citizenship. These visas are usually temporary but can be renewed if the employment continues.

Many visas can be applied for online; these are known as e-visas. Increasingly, many countries are moving toward online visa applications. Exceptions are made for those who can’t apply online due to a disability or other extenuating circumstance.

Recommended: Guide to Saving Money on Hotels

How to Apply for a Travel Visa


If you are planning a trip and realize you need a travel visa, here’s how to spring into action. You’ll want to apply for it with your destination country’s government travel agency. During the application process, you’ll be asked to provide basic identifying information and, if applying online, you may be asked to upload a photo of your passport. The U.S. Department of State is a great resource for up-to-date information on which countries require a visa and how to apply for them.

Seems simple, right? It is, but with a couple important caveats when contemplating how to get a visa.

•   Having a valid passport isn’t always enough to enable travel. Many countries require your passport to have at least six months left before the expiration date at the time of your trip.

•   Applying for a passport in the first place can be a somewhat lengthy process; it may take as long as 11 weeks to get your passport in the mail after you apply. Even expedited processing, which comes with an additional fee, starts at five weeks of lead time. All of which is to say, make sure you have your passport ducks in a row well before you’re getting ready to actually apply for your visa.

Which Countries Require a Visa for U.S. Citizens?


Visa requirements change regularly. A case in point: The United Kingdom, which has long allowed U.S. citizens to travel without a visa, will soon require visitors to go through an online application system.

For the most up-to-date information — and before you lock in flights for a family vacation — check with the U.S. Department of State or your destination country’s travel agency to make sure you have everything set up for success before you head to the airport. At that time, you can also find out how long it will take to receive your visa. For e-visas, it may take just a couple of days.

That said, here are a few popular travel destinations that do require visas for U.S. travelers, along with notes to help you plan.

Country Application Process Fee Duration of Visit
Australia Apply online with the Australian Department of Home Affairs AUD20 processing fee Up to 3 months at a time over 12 months
China China requires U.S. citizens to apply for a visa ahead of travel. Regular processing takes 4 days, and express service takes 3. You must have at least 6 months of validity on your passport and may need to meet other requirements, such as providing proof of round-trip air travel. $140 Single, double, and multi-entry visas are available over the course of 6 months, and 12 months or more
India You can apply for a visa online; processing may take 5 business days or longer $25-$80, depending on visa duration Not more than 180 days of any calendar year
Kenya E-visa required, along with proof of yellow fever vaccination $51 Visa is valid for three months from the date of issue and may be extended for 90 days
Russia The U.S. Embassy calls Russia’s visa program “restrictive and complicated,” and it can take up to 20 days to get an exit visa if your visa expires during your visit. Still, it’s possible to apply for a visa ahead of time if you have your heart set on a visit, though the process will take research, time investment, and several steps. $160 90 days in any 180-day period
United Kingdom As mentioned above, the U.K. will soon require an Electronic Travel Authorization (ETA) of U.S. travelers. This is different from, but similar to, a visa. Processing will take a few days, but the application only takes a few minutes. Free 180 days
Vietnam You must apply for an e-visa online before arrival. Urgent processing is available, but normally processing takes 2 business days. $17-$65 depending on visa duration One-month single and multiple entry, and 3-month single and multiple entry visas available

Visa-Free Places for U.S. Passport Holders


To repeat the caveat again: The best way to know for sure if a visa is required is to research your specific destination ahead of time. That said, here are some popular destinations that are currently visa-free for U.S. passport holders. Note: This list is not exhaustive, and time restrictions may still hold.

•   American Samoa

•   Antigua and Barbuda

•   Argentina

•   Aruba

•   Belize

•   Bermuda

•   Brazil

•   Botswana

•   Canada

•   Chile

•   Colombia

•   Costa Rica

•   Curacao

•   Ecuador

•   Europe: Much of Europe allows visa-free entry for up to 90 days

•   Dominican Republic

•   Haiti

•   Honduras

•   Jamaica

•   Japan

•   Mexico

•   Morocco

•   Namibia

•   Nicaragua

•   Panama

•   Peru

•   Puerto Rico

•   Philippines

•   Scandinavia: Sweden, Denmark, Finland, Iceland, and Norway don’t require visas for stays of 90 days or less

•   Singapore

•   Senegal

•   South Africa

•   Thailand

•   Trinidad and Tobago.

Recommended: Where to Keep Your Travel Fund

Tips to Help Your Travel Plans Run Smoothly


Making sure you have the visa you need is only one part of travel planning. While you’re getting organized, here are a few more things to think about:

•   See if your furbaby needs a visa. Those traveling with pets may need to bring certain documentation in order to get their crate past customs. Otherwise, you might be unpleasantly surprised by a lengthy quarantine requirement.

•   Make sure your money is ready to travel, too. For international travel, it’s pretty key to have a travel credit card or cash back rewards credit card that doesn’t charge foreign transaction fees.

•   Get rewarded for air travel. If you usually fly with a specific airline, applying for an airline credit card could help you stack miles — and fly further for less.

•   Find ways to save. No matter how you slice it, international travel is expensive. Fortunately, there are plenty of ways to save on everything from lodging to rental cars — so you don’t eat through your travel fund all in one go.

The Takeaway


U.S. nationals are lucky to have a long list of countries that don’t require a visa for them to visit. However, some countries do (including popular destinations), so it’s important to research requirements. Find out if you need a visa for your trip well before your travel dates so you don’t run into unexpected delays.

SoFi Travel is a new service exclusively for SoFi members. Through a partnership with Expedia, we make it easy to find the lowest rates and book your reservations — for flights, hotel rooms, car rentals, and more — all in one place. Earn 2x rewards when booking with your SoFi Mastercard or debit card. And when you redeem your SoFi rewards for travel, you get a 25% bonus: $100 of reward points are worth $125.


Wherever you’re going, get there with SoFi Travel.


Photo credit: iStock/minemero


**Terms, and conditions apply: The SoFi Travel Portal is operated by Expedia. To learn more about Expedia, click https://www.expediagroup.com/home/default.aspx.

When you use your SoFi Credit Card to make a purchase on the SoFi Travel Portal, you will earn a number of SoFi Member Rewards points equal to 3% of the total amount you spend on the SoFi Travel Portal. Members can save up to 10% or more on eligible bookings.


Eligibility: You must be a SoFi registered user.
You must agree to SoFi’s privacy consent agreement.
You must book the travel on SoFi’s Travel Portal reached directly through a link on the SoFi website or mobile application. Travel booked directly on Expedia's website or app, or any other site operated or powered by Expedia is not eligible.
You must pay using your SoFi Credit Card.

SoFi Member Rewards: All terms applicable to the use of SoFi Member Rewards apply. To learn more please see: https://www.sofi.com/rewards/ and Terms applicable to Member Rewards.


Additional Terms: Changes to your bookings will affect the Rewards balance for the purchase. Any canceled bookings or fraud will cause Rewards to be rescinded. Rewards can be delayed by up to 7 business days after a transaction posts on Members’ SoFi Credit Card ledger. SoFi reserves the right to withhold Rewards points for suspected fraud, misuse, or suspicious activities.
©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender. NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org).


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.



Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

This article is not intended to be legal advice. Please consult an attorney for advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Business vs Personal Checking Account: What's the Difference?

Business vs Personal Checking Account: What’s the Difference?

They say you should never mix business with pleasure — and that applies to bank accounts, too. If you’re a freelancer, small business owner, or entrepreneur, chances are opening a business checking account could be a good move for you.

While both business and personal checking accounts allow you to safely store money and utilize those funds to pay bills and expenses, there are some important differences that make a business checking account a good idea for most folks who work for themselves. In fact, depending on the structure of your business, you may be legally obligated to open a business bank account — which is a pretty compelling argument to do so, we’d say.

Let’s take a closer look at how a business checking account differs from a personal checking account. We’ll cover:

•   What is a business checking account and how it works

•   What is a personal checking account and how it works

•   What are the key differences between a business vs. a checking account

•   Which one (or both) is right for you

🛈 While SoFi does not offer business bank accounts at this time, we do offer personal checking and savings accounts.

What Is a Business Checking Account?

A business checking account is a checking account specifically designed for business owners. As such, they often include business-specific features, such as payroll or bookkeeping integrations, the ability to assign debit cards to employees, or simplified credit card payment processing.

In many other ways, however, a business checking account is a lot like the personal checking account you likely already have. It’s a (relatively) safe place to stash cash and use it for regular, day-to-day expenses by way of writing checks, using a debit card or initiating transfers. For example, it can allow you to:

•   Pay suppliers

•   Deposit payments from customers

•   Pay employees

But it’s only to be used for business-related expenses!

How Does a Business Checking Account Work?

When thinking about a business checking account vs. a personal account, you’ll find many similarities. You open the account, fund it with some money, and, hopefully, go on to deposit more cash as profits from your business roll in.

You’ll likely have access to the account via a debit card and/or a checkbook, and will likely also be able to log into the account and manage it online. (Both digital-first and brick-and-mortar banks offer business bank accounts these days, and most feature some kind of virtual account management option.) Business banking products often bundle both a checking and savings account, so you can start creating a cushion for a rainy day.

However, as mentioned above, a business bank account may come with some additional, business-specific features. It may also come with higher fees and minimum account balance requirements than a personal checking account, not to mention requiring documentation to prove you do, in fact, have a business.

What Is a Personal Checking Account?

A personal checking account is, well, a checking account used for personal expenses. Just like a business checking account, it’s a place where you can stash your cash with relatively few worries and use it to pay bills and expenses using a debit card, checkbook, or transfer services. Many banks also make it easy to bundle a personal checking account with a personal savings account, which is a great place to stash your emergency fund.

Unlike business checking accounts, though, a personal account won’t include those fancy features we were talking about. On the bright side, though, it’s very possible to find free personal checking accounts, which can help you save cash on those pesky monthly maintenance fees.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


🛈 While SoFi does not offer business bank accounts at this time, we do offer personal checking and savings accounts.

What Are Personal Checking Accounts Used For?

Personal checking accounts are commonly used for:

•   Storing money earned through employment or other income streams

•   Paying bills using transfer services or paper checks

•   Making transfers to friends, family, and businesses

•   Making point-of-sale purchases using a debit card

As their name suggests, personal checking accounts are designed to help you manage personal expenses and attend to your everyday money needs. Typically, a personal checking account is the hub of someone’s daily financial life.

What’s the Difference Between Business and Personal Checking?

Let’s recap what we’ve learned about the difference between business and personal checking accounts.

Business Checking Accounts

Personal Checking Accounts

A place to safely store money and access it for regular business expenses A place to safely store money and access it for day-to-day personal expenses
May come with additional business-friendly features, such as payroll and bookkeeping integration Designed for personal use; may offer person-to-person transfers and other useful features
May come with a bundled business savings account May come with a bundled personal savings account
Often come with minimum opening deposit or minimum monthly balance requirements and fees; you’ll need to offer documentation proving you have a business Many personal checking accounts are available for free
Helps entrepreneurs separate out their business expenses for ease of accounting and remaining compliant with regulations Makes paying bills and other regular expenses more manageable, regardless of your source of income

Are Business Checking Accounts FDIC Insured?

Any business checking account worth its salt should be FDIC insured — or NCUA insured, if it’s opened and held at a credit union. The FDIC is a government agency that protects deposit accounts, such as checking accounts, and reimburses lost funds up to the $250,000 standard insurance amount in the event your bank fails. (Some banks participate in programs that extend the FDIC insurance to cover millions1.) The NCUA is a similar agency, but specifically geared toward credit unions.

The FDIC and NCUA insure business and personal accounts alike, but it’s always important to double-check and make sure the bank or financial institution you’re hoping to open an account with explicitly states that deposits are insured.

When Does Someone Need a Business Checking Account?

If you’re a small business owner — or even a freelancer — a business checking account might be a good idea, even if it’s not technically required. Keeping your business and personal expenses separate can help make accounting easier, simplify your tax reporting process, and help make your business look more legitimate to the IRS.

In addition, if you’re incorporating (i.e, operating as LLC, S corp, or other type of business entity), separating your business expenses from your personal expenses can help protect your assets in the event you get sued. Even if it’s not legally required, many accountants and law professionals recommend their clients open a business bank account for this reason.

A business bank account can help you:

•   Separate your business and personal expenses, which can both protect your assets and make bookkeeping easier

•   Help make your tax reporting easier, as all of your deductible expenses will be in one place

•   Make it easier to see you business’s cash flow and make adjustments to your business model as needed, or valuate the business for other purposes

•   Make your business look more legitimate to both the IRS and potential customers, vendors, and other parties you interact with professionally

Establish a relationship with a bank that could allow you to more easily take out a business loan or business line of credit in the future.

Can I Use the Same Bank for Personal and Business Banking?

In many cases, you technically can use your personal checking account for business banking… but doing so is generally considered ill-advised by experts for the reasons listed above. Just for starters, it makes separating out your expenses a lot harder — and you’ll definitely want to have a handle on those so you can get any deductions coming your way.

Case in point, the IRS explicitly recommends keeping separate business and personal bank accounts for record-keeping purposes. It’s easy to let it go by the wayside if you’re just starting up as a small business owner or entrepreneur, but consider whatever expenses the account incurs as part of your business start-up costs. It’s worth it in the long run!

What’s more, it’s a wise move to separate your business and personal accounts in the event that you ever get audited. Combined accounts can lead to a very challenging situation if you ever need to prove your business vs. personal cash flow, expenses, and other aspects of your banking life.

Choosing the Right Business Checking Account

When you are shopping for a business checking account, there are a few features that should be considered to help ensure that you find the right match. These include:

•   Fees. Many business accounts have fees associated with them, and if you are able to get them waivered, the financial requirements (say, the amount you have held in the account) tend to be higher than for personal accounts.

•   Cash deposit limits. Your bank may set a limit in terms of the amount of money you can put in the account per billing cycle. If you hit that amount, you may accrue a cash-handling fee.

•   Transaction limits. Your business checking account may have a limit on the number of transactions they will handle for free per billing cycle. Go over that amount, and you may be charged.

•   Interest. There are business accounts that offer interest on your balance. Do the math though to see if this should be a deciding factor in your choice of a bank. If fees are higher at the bank offering interest, you might wind up losing money in the long run.

•   Bundled services. Your bank might offer some free features, like a business credit card or merchant services along with your checking account.

Depending on the nature of your business and how you handle your banking, some of these factors may matter more than others. Find the bank that gives you the most features and perks you are seeking with the lowest fees possible.

The Takeaway

If you own your own business or earn freelance income, keeping your business expenses separate from your personal expenses can help simplify your life in many ways. A business bank account will help keep these finances separate, streamlining accounting and tax preparation, and protect you if you were ever faced business liability.

But let’s not forget that keeping your personal banking in tip-top shape is vital, too. That’s where the SoFi Checking and Savings bank account can help. When you sign up with direct deposit, you’ll get both checking and savings with absolutely zero account fees and earn a competitive APY just for letting us hold onto your funds.

See how much better you can bank with SoFi.

FAQ

What documents are required to open a business checking account?

In order to open a business checking account, you’ll need your regular, basic documents — like your government-issued picture ID — as well as business-specific documents such as your EIN and business license. Check with the bank you’re considering directly for full details on which documents are required

Can I open a business checking account without an LLC?

It depends on the financial institution, but yes, business accounts are available that don’t require the business owner to be incorporated in any way

Can I use a personal checking account for business?

You can — the question is whether or not you should. Separating your business and personal expenses can make your life, or your accountant’s life, a lot easier when it comes time to assess your business finances or pay taxes. In addition, there are special business banking features you might get if you opt for a business-specific account.


Photo credit: iStock/mapodile

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Brokerage Account vs. Cash Management Account

Cash Management Accounts (CMAs) vs Brokerage Accounts: How They Compare

Investors need a brokerage account to buy and sell securities, but they can also take advantage of a cash management account (CMA), which is offered by a brokerage firm. It can be easy to confuse the two types of accounts, even though they are quite different.

To provide some clarity about the difference between a brokerage account vs. cash management, this article will examine some of the pros and cons of each. Let’s start with some definitions.

What Is a Cash Management Account?

Cash management accounts can offer similar features as the traditional checking or savings accounts that banks offer. CMAs allow you to deposit money and earn a set interest rate. Most provide access to your money via debit cards, in addition to checks.

What Is a Brokerage Account?

Brokerage accounts allow customers to deposit money which can then be used to buy and sell investments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities.

There are three main types of brokerage accounts.

•   A full-service brokerage firm usually provides a range of financial services including financial advice and automated investing.

•   A discount brokerage offers lower fees in exchange for fewer financial planning services.

•   Online brokerages allow you to trade via the internet and often charge the lowest fees.

Recommended: How Does a Brokerage Account Work?

Similarities Between a Cash Management Account and Brokerage Account

Although brokerage and CMA accounts work in different ways, there are some similarities.

Both Offered by Brokerages

Both types of accounts are offered by brokerage firms. When you open a brokerage account and link it to a CMA at the same firm, it can provide a convenient way for customers to transfer assets from one account to another when they buy and sell securities.

The Potential to Earn Returns

When considering a brokerage account vs a cash management, remember that they both offer customers the potential to earn money on deposits or investments.

In a self-directed brokerage account you have the potential to earn returns from your investments, although you also face the risk of loss that likewise comes with investing in stocks, bonds, and other securities.

A cash management account is generally a safer place to keep your money. The risk of losing money is lower than putting your money into securities, and you’ll earn interest on your deposits. But those rates are generally lower than the gains you might see from other investments.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


The Brokerage Account vs Cash Management: What Are the Differences?

Cash management accounts and brokerage accounts work in different ways. CMAs mirror traditional savings and checking accounts and brokerage accounts are strictly for investments. Here are the details:

Earnings Come From Different Places

In a brokerage account, potential earnings come from the gains you might see when investing in stocks, bonds, and other investments. Investing in securities also comes with the risk of losses.

Earnings in cash management accounts come from the interest rate paid on your balance. Usually, these rates are similar to the rates paid in traditional savings accounts.

CMAs also act like traditional checking accounts because you can use checks or a debit card for purchases. But traditional checking accounts don’t usually pay interest, or if they do the rate is often lower than a CMA.

Earnings on Brokerage Accounts Are Potentially Higher Over Time

Over time, the average return of the stock market has substantially outperformed what you can earn from interest in a savings account. With those potential earnings comes market risk, meaning you may experience losses too, especially in the short-term.

To manage a brokerage account or work with a broker, you need to take into account your tolerance for market risk and what combination of stocks and bonds is right for your financial goals.

Insurance Is Provided by Different Sources

When you open a new bank account, up to $250,000 of your cash deposits are covered by the Federal Deposit Insurance Corporation (FDIC). Some banks, however, participate in programs that extend the FDIC insurance1 to cover millions.

Most brokerage accounts, however, are insured by the Securities Investor Protection Corporation (SIPC) in the event of theft, fraud, or if the broker fails. The SIPC offers up to $500,000 of coverage total, per person, if such a loss were to occur. The SIPC does not cover investment losses.

Cash management accounts have so-called sweep accounts, which are insured by the FDIC. Here’s how it works: CMAs sweep funds into a variety of FDIC-insured banks. If you make a $200,000 deposit, for example, your money may be split into four $50,000 deposits in four different bank accounts. (The CMA provider manages this process — you only see your total CMA balance.)

Before your money is moved into the different accounts, your deposit is protected by SIPC insurance if the brokerage is an SIPC member.

What Money in These Accounts Can Be Used for

Because CMA accounts have checking and/or debit cards, you can use that money for purchases or bill paying or ATM withdrawals.

Money kept in a brokerage account is strictly used for trading securities. But by linking a CMA to your brokerage account, you can easily transfer cash from one to the other, for investing purposes.

The Takeaway

When considering a brokerage account vs. cash management, it helps to know what makes these accounts different, and how they can work together. While a brokerage account is for trading securities, and comes with the risks associated with investing in securities, a cash management account (CMA) is similar to a traditional checking or savings account. There’s almost no risk of losing money, and your deposits can earn interest. Because both are offered at brokerage firms, you can have both, and use your cash management account as a place to keep funds you don’t wish to invest.

To determine which account is right for you or if you should have both, it’s best to look closely at your financial goals and determine what type of returns and account features suit your aims.

SoFi Checking and Savings is an all-in-one account that blends the features of checking and savings accounts. With the special “vaults” feature, you can separate your savings from your spending, earn competitive interest on your total balance, and pay no account fees or monthly fees.

Create a SoFi Banking account today and bank better.

FAQ

Are brokerage accounts and cash management accounts the same?

No. Brokerage accounts are used to buy and sell securities. Cash management accounts act more like traditional bank savings and checking accounts, but are provided by brokerage and other non-bank financial institutions. Sometimes the accounts may be linked. But the accounts earn money from different sources.

Can you keep cash in a brokerage account?

No. You can use cash deposits in your brokerage account only to purchase securities. A cash management account, on the other hand, is similar to a traditional savings or checking account, so cash balances are welcome (and earn interest).

Do cash management accounts and brokerage accounts work together?

In most cases, yes. If you have a CMA and a brokerage account at the same brokerage firm and the accounts are linked, you can use your CMA to move cash into your brokerage account in order to execute trades. You can also transfer the money from sales of securities into your CMA for safekeeping. The combination gives you the ability to purchase stocks, bonds, mutual funds and other securities, but also offers the flexibility, liquidity and interest earnings of traditional bank accounts.


Photo credit: iStock/Aja Koska

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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What Is a Cash Management Account

Guide to Cash Management Accounts (CMAs)

A cash management account or CMA provides an alternative solution for storing a large sum of money. Instead of using a checking or savings account from a traditional bank or credit union, you can park your money with non-financial institutions such as robo-advisors, online investment companies, or trading apps. While CMAs provide some of the features you receive from traditional banking, they also make managing your money more convenient since you can keep your banking and investing under one roof.

Here’s your complete guide to cash management accounts to discover if this type of account is right for you. We’ll share details on:

•   What is a cash management account?

•   How do cash management accounts work?

•   What are the benefits and considerations of cash management accounts?

•   Is a cash management account right for you?

What Are Cash Management Accounts?

Let’s explore what a cash management account is exactly. A CMA or cash management account provides a solution for managing your cash flow and your money. The cash inside the account usually earns interest, so your money can grow over time. You also may have checking writing capabilities, debit card access, or a combination of both. These non-banking institutions usually have no fees, another attractive aspect of using a cash management account. However, they typically make their money by charging fees for other services such as investing, retirement planning, or financial planning services.

While traditional banking accounts have similar benefits, the biggest draw to a cash management account is that you can bank and invest with one company. This way, you’re not toggling back and forth between several companies or platforms to manage your money.

How Do Cash Management Accounts Work?

Now that you know what a CMA is in big-picture terms, let’s drill down on how they work. Cash management accounts are interest-earning accounts that offer a safe place for cash. Since investment firms and robo-advisors are not banks, they don’t keep your money at their financial institution. Instead, they partner with several banks and spread your deposit out among them.

Like traditional banking accounts, account holders can deposit funds, withdraw funds, transfer money, set up direct deposits, write checks, and use a debit card. You can manage your personal cash flow statement by checking on your CMA regularly.

In addition, some CMAs earn interest like savings accounts and have checking account capabilities. Therefore, they can act as a way to merge these accounts into one. However, some CMAs may not have features of both accounts, so check with the institution to determine what features are available.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


What Are the Pros of Cash Management Accounts?

Understanding the benefits of using a cash management account can help you determine if this is the right banking solution for your needs. With that in mind, here are several advantages of using a cash management account.

Convenience

The most significant pull for consumers to open a cash management account is that they can keep their investments and banking under one umbrella. Keeping everything in one place can simplify your money management efforts.

Traditional Banking Features

When you open a cash management account, you typically have access to tradition banking features like:

•   Direct deposit

•   Complementary ATM networks

•   Electronic bill pay

•   Third-party payment site access

But, before you open an account, make sure you check with the institution about their banking services. This way you can ensure they have everything you need.

FDIC Insured

The Federal Deposit Insurance Corporation (FDIC) protects your banking deposits from losses up to $250,000. Worth noting: Some banks participate in programs that extend the FDIC insurance to cover millions1.

So, if your bank fails for any reason, you can recover your funds. While non-banking firms are prohibited from offering FDIC insurance directly, their partner banks can extend coverage. Since nonbanks spread funds across several partner banks, each can offer $250,000 of FDIC insurance per depositor.

What Are the Cons of a Cash Management Account?

Now that we’ve considered the advantages of a cash management account, it’s only fair to review the potential downsides of these financial vehicles. Here are some points to keep in mind as you decide whether a CMA is right for you.

Lower Interest Rates

While these accounts do offer some earnings, you will often find better rates at online banks. Yes, it may as if low-interest checking accounts are the norm and that CMAs are in their ballpark, but dig a bit deeper. If you are planning on parking a large sum of cash in an account, it can literally pay to explore your options elsewhere and see what APY’s are available in high-interest accounts. You may find that a short-term savings account works better for your needs.

Recommended: APY vs. Interest Rate: What’s the Difference?

Fewer Features

Cash management accounts may not offer the conveniences of checking accounts, like bill pay and other ways of making your financial life simpler.

No Physical Branches

Many cash management accounts are offered by online banks, which means you won’t have bricks and mortar locations to visit. Nor will you have a team of bankers to support you as you do at a traditional bank. If you are the kind of person who prefers personal interaction, this may be a significant issue for you.

Cash Management Accounts vs Checking Accounts

While cash management accounts offer similar services and features to traditional bank accounts, you might wonder what the differences are. If we break down CMAs compared to checking accounts further, these features are worth noting.

•   Maintenance fees. There are usually no maintenance fees for CMAs. However, you may have to meet a minimum balance to keep your account active. On the other hand, depending on the bank, some high-yield checking accounts come with maintenance fees. It may be possible to get these fees waived if you meet specific bank stipulations, but it’s worthwhile to consider this point.

•   Interest earning. Many cash management accounts earn interest, like what you find with high-interest online savings accounts. While it’s possible to earn interest on a savings account, it’s usually less than the interest cash management accounts earn.

•   Account integration. Investment firms and robo-advisors usually offer cash management accounts and investments. You can usually link your CMA with your investments, making it easy to move money and automate contributions. Traditional banks may also offer retirement and investment services. However, that’s not their primary business. Also, if you have investments and banking accounts separate, there may be a time lag for transactions, which usually doesn’t happen with CMAs.

Considerations When Comparing Cash Management Accounts

Before you enroll in a cash management account, it’s wise to compare all of your options. You may also want to assess the pros and cons of each banking solution. So, when comparing your solutions, here are some things worth considering when determining if a CMA is suitable for your needs.

Customer Service

When you need an issue resolved with your money, it’s nice to know customer service is there to help. So, you will want to make sure that the company you’re considering offers a robust customer service solution to assist you with all of your questions or concerns. For online banks, check out the hours that support is available and find out if you’ll be interacting with a human or an automated assistant.

Minimum Balance Requirement

As we noted above, CMAs can have minimum balance requirements to keep the account active. Therefore, you’ll want to determine these requirements in advance to see if you have the appropriate sum of cash to deposit.

Investment Management

Most of the institutions that offer cash management accounts offer investment services. So, if you’re looking to use their investment service, make sure you select a company you trust and feel comfortable with. You’ll also want to ensure the investments offered are suitable for your needs.

Is a Cash Management Account a Good Fit for You?

A CMA is ideal for folks who like to manage their investments and bank accounts under the same umbrella. It may make managing your money somewhat simpler and smoother.

But, for those who feel a bit uncertain about using online banks or mobile apps to complete their daily transactions, a bank account may be a more viable solution. Also, if you would prefer to separate your investments and banking needs, a high-interest checking or savings account may make more sense that stashing your funds in a CMA.

The Takeaway

CMAs are interest-earning alternative solutions to traditional banking accounts like checking and saving accounts. Since investment firms usually offer CMAs, you can keep your investments and banking needs in one place, streamlining your money management efforts. As with most services, there are pros and cons to these accounts. Determining whether one is right for you will depend upon your reviewing all the features and seeing what is the best fit for your money management style and goals.

If you feel more comfortable with traditional banking, SoFi offers a smart, money-savvy solution. Our online bank accounts, when opened with direct deposit, are fee-free and earn a competitive APY. Also, you can access your paycheck up to two days earlier. We think it’s a great combination of convenience and money-growing features that you’ll love.

Ready to bank better? Come see what SoFi offers.

FAQ

What is the purpose of a cash management account?

Cash management accounts give consumers a way to complete everyday banking transactions like bill pay or direct deposit while managing investments, all under one roof.

What type of account is cash management?

A cash management account is like a traditional bank account, except it’s offered by non-banking firms, like online investment firms or robo-advisors. You can complete transactions (direct deposit, withdrawals, check writing, etc.) the same way with a traditional checking or savings account.

Is a cash management account the same as a money market account?

While cash management accounts and money market accounts have similar features (earning interest, withdrawals, deposits, etc.), they are not the same. Banks offer money market accounts, while nonbanks like robo-advisors offer cash management accounts.


Photo credit: iStock/MicroStockHub

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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overhead view of businessman working, looking at business charts and graphs

Guide to Share Lending

Share lending is when investment firms loan shares to borrowers as a way to collect additional revenue on stocks they already hold. This produces another revenue stream on equities that would otherwise sit untraded in their portfolios.

The borrowers of the shares are often short sellers, who give collateral in the form of cash or other securities to the lenders.

What Is Share Lending?

Share lending is very much as it sounds: Institutions lend out shares of stock to other investors in order to generate more revenue.

The lenders tend to be pension funds, mutual funds, sovereign wealth funds, and exchange-traded fund (ETF) providers, since these types of firms tend to be long-term holders of equities.

Brokerages can also practice securities lending with shares in retail investors’ brokerage accounts. Share lending can help such firms keep management fees down for their clients.

Share lending is also known as securities lending, as the practice can extend beyond equities to bonds and commodities. Securities lending has become more popular in recent years as increased competition in the brokerage space drove down management fees to near-zero, and investment firms sought other sources of revenue. Worldwide revenue from securities lending totaled $9.89 billion during 2022.

Share lending is also useful to investors who are shorting stock, because those investors need to borrow shares in order to open their positions.

Critics argue that the practice comes at the expense of fund investors, since investment firms forgo their voting rights when they loan out shares. They might also try to own stocks that are easier to rent out.

Other concerns about share lending include a lack of transparency, and an increase in counterparty risk. That said, because short-sellers often use margin trading as a way to increase their potential returns, they’re likely used to assuming risk.

How Securities Lending Works

Here’s a deeper breakdown of how share lending works:

1.    Institutional investors use in-house or third-party agents to match their shares with borrowers. Such agents receive a cut of the fee generated by the loan.

2.    The fee is agreed upon in advance and typically tied to how much demand there is for the lent-out security on the market.

3.    The institutional investor or lender often reinvests the collateral in order to collect additional interest or income while their shares are out on loan.

4.    Borrowers tend to be other banks, hedge funds, or broker-dealers, and sometimes include other lending agents. When the borrower is done using the shares, they return them back to the lender.

5.    If the collateral posted was in the form of cash, a percentage of the revenue earned from reinvesting is sometimes given back to the borrower.

Retail investors should learn whether their brokerage offers securities lending or share-lending programs. If you have a margin account at a brokerage or with a specific investing platform, there’s a good chance that you may be eligible or given access to a share-lending program. But you’ll need to ask your specific brokerage for details.

For some dividend stocks, investors could get some form of payment from the borrower, rather than the dividend itself. This payment may be taxed at a higher rate than a dividend payout.

Share Lending and Short Selling

In order to short a stock, investors usually first borrow shares. They then sell these shares to another investor or trader, with the hope that when or if the stock’s price falls, the short seller can buy them back and pocket the difference, before returning the loaned shares.

In share lending, a share can only be loaned out once — but when the borrower is a short seller, they can sell it, and the new buyer can lend it again. This is why the short stock float — the percentage of the share float that is shorted — can rise above 100% in a stock.

The fee generated by lending out shares depends on their availability. A small number of stocks tend to account for a large proportion of revenue in securities lending.

Criticism of Securities Lending

The lack of transparency in securities lending is a concern for many investors — both retail, and institutional.

The Dark Side of Share Lending

In December 2019, Japan’s Government Pension Investment Fund, among the world’s largest, announced that it would halt stock lending, saying the practice is not in line with its goals as a long-term investor. They further cited a lack of transparency regarding the identity of the individuals or entities borrowing the loaned securities, as well as their motivations for borrowing.

This became a bigger concern for investors after the “cum-ex” scandal in Germany, where borrowed shares were allegedly used in a tax evasion scheme.

Voting Rights Transferred

Another one of the biggest criticisms of share lending is that shareholder voting rights attached to the actual stock are transferred to the borrower.

This practice challenges the traditional model, in which institutional investors vote and push for change in companies in order to maximize shareholder value for their investors. Money managers can recall shares in order to cast a vote in an upcoming shareholder meeting. But there are concerns that they don’t, and it’s unclear how often they do.

A Hidden Problem

Another concern is that share lending programs incentivize money managers to own stocks that are popular to borrow, but may underperform. A 2017 paper entitled “Distortions Caused By Lending Fee Retention,” updated in July 2022, found that mutual funds that practice securities lending tend to overweight high-fee stocks which then underperform versus funds that do not rent out shares.

Pros and Cons of Share Lending

There are numerous pros and cons to share lending.

Pros

The most obvious upside for investors is that they may be able to open up an additional revenue stream to increase their returns by lending their shares. Along the same lines, share lending can also help investors turn otherwise dormant investments into return-boosters, under the right circumstances.

Also, lending shares allows for investors to lend their shares to short-sellers — thereby greasing the wheels of the market and allowing short-sellers to do their work. It adds liquidity to the market, in other words.

Cons

One downside to share lending is that retail investors should take note that securities that have been loaned are not protected by the Securities Investor Protection Corporation (SIPC). The SIPC, however, does protect the cash collateral received for the loaned securities for up to $250,000.

There can also be negative tax consequences when lending out shares of stock. You don’t receive dividends for the stocks you’ve loaned out, but you do get Payment in Lieu that’s equal to the value of the dividends paid on loan shares. Unfortunately, though, these payments are taxed at your marginal tax rate, not the more favorable dividend rate.

Another concern is the increase in counterparty risk (similar to credit risk). Let’s say a short seller’s wager goes sour. If the shorted stock rallies enough, the short seller could default and there’s a risk that the collateral posted to the lender isn’t enough to cover the cost of the shares on loan.

Finally, there may be additional and special criteria that investors need to meet in order to qualify for share-lending programs. This will depend on individual brokerages or platforms, however. And a final note: If you use a platform that allows you to buy or trade fractional shares, those fractional shares may not be eligible for share lending, either.

Pros and Cons of Share Lending

Pros

Cons

Potential to earn more revenue Lack of SIPC protection
Allows investors to boost returns from dormant investments Increased counterparty risk (the borrower may default)
Adds liquidity to short-seller market You’re taxed at the marginal rate on payments in lieu of dividends
Investors may need to qualify

The Takeaway

Share lending or securities lending is a potential source of revenue for institutional investors and brokerage firms, who rent out shares that otherwise would have sat idly in portfolios. The practice has ramped up in recent years as management and brokerage fees have shrunk dramatically due to competition and the popularity of index investing.

There are pros and cons, however, as there’s always a risk that a borrower could default. That’s offset, naturally, by the chance to earn additional revenue and boost your ultimate returns. But there are no guarantees.

If you’re interested in investing in stocks, you can start building your portfolio with SoFi Invest. When you open an Active Invest account, you can start trading stocks online with SoFi Invest’s secure, streamlined platform today. And you may qualify for share lending, which could bring in some income.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What are the risks of share lending?

Some of the biggest risks of share lending are counterparty risk (or, the risk that a borrower will default and not be able to return your shares); the fact that you may lose SIPC protection on your shares; and that you may need to qualify in order to actually lend shares.

What exactly happens when you lend shares?

When you lend shares, ownership is temporarily transferred to a borrower, who transfers other shares or investments to the lender as collateral. The borrower also pays the lender a fee for the privilege of borrowing their shares.

Does share lending save money?

It doesn’t necessarily save money, but it can be a way to earn more money or drive more revenue from your owned investments. By lending out shares, you can garner fees from borrowers, amounting to a boost to your overall return.


For members enrolled in the Apex Fully Paid Securities Lending Program, securities are lent based on the Master Securities Lending Agreement. Members are eligible to receive a monthly payment if Apex lends out any securities. The payment is a percentage of the total net proceeds earned, which is subject to change. There are risks with share lending, for a detailed review of those risks please review the Important Disclosure. Members may opt out of the Securities Lending Program at any time by sending us a message via chat.
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