Putting the use back into Art - the rise of Art Lending

Posted by: Bethan Waters and James Carleton | Date posted : 05/05/2015

Oscar Wilde (who once wrote that "all art is quite useless") would probably have had something to say about the recent resurgence of the art lending market. In a post-Lehman world where borrowers and lenders alike are looking to explore alternative forms of finance and security, the lucrative world of art is starting to reignite the interest of financiers who had long since abandoned it.

Put in the simplest of terms, an art financing is a loan which is secured not by a mortgage on a house or by a charge over shares, cash or any other traditional asset, but on a piece or portfolio of artwork. If the borrower can't repay the loan, the lender can take the art (and most likely, sell it). Traditionally the number of lenders prepared to offer funds secured against art has been very limited, not because of the shortage of borrowers with valuable art to offer, but due to the inherent problems of ensuring that a lender is protected in the event that the loan doesn't perform and the art needs to be sold. When taking asset security of any description, lenders will always need to be confident of three things: (i) the title or ownership of the secured asset "from birth" and its authenticity; (ii) the present and likely future value of such asset and (iii) the identity and physical "security" of the asset. Herein lies the rub.

Title and ownership

As opposed to property, companies, aircraft or ships, there is no compulsory art register in the United Kingdom. Nor is there a system akin to the UCC filing system by which a party can register its interest in a piece of art. This means that title (or ownership) of the art to be offered as security must be proved by other means. Typically this is done through retained auction catalogue entries, sales receipts  and by searching the Art Loss Register (a permanent international database of stolen and missing works of art), a well-honed but clearly inexact science. Gaps can arise and title can never really be "proved" with one hundred per cent certainty and there is no real guarantee of authenticity. Lenders need to accept the risk that claims may arise in the future, which at best are likely to involve cost to defend and at worst, loss of the loan collateral. Whilst some traditional financiers may find this to be a risk too far, some newer lenders perceive the higher returns to be worth the gamble and are actively promoting their capabilities in this market.


A key concern for lenders is to ensure that the assets being provided as collateral are sufficiently valuable that in the event of the borrower being unable to repay the loan, the lender could recoup monies owed by selling those assets. Not so straightforward with an asset as subjective as art. Artists, especially modern artists, fall in and out of favour quickly and whilst one valuer may ascribe a multi-million dollar value to a painting, another may consider it to be worth only thousands. Some art valuers themselves have links to auction houses and obtaining a "real" valuation can sometimes prove problematic. Truly valuable art is not traded with the frequency of other typical security assets and value comparators are not always available. Whereas a whole street of Victorian terraces could be used to compare value for the purposes of a mortgage, artworks are often unique. This also somewhat plays to the strengths of the newer entrants to the market (often funds or smaller institutions), who can often take a more pragmatic and holistic approach to the determination of value than older and larger establishments with rigid valuation procedures and regulatory pressures.

Identification and security

Perhaps the most fundamental issue of all can be summarised by borrowing again from Mr Wilde: "the only excuse for making a useless thing is that one admires it intensely". Most borrowers own art for the very purpose of “admiring it intensely,” proudly displaying it on their walls or in their homes. If a lender lends against a piece of art however, he needs to ensure that this piece (as his collateral when everything goes wrong) is secure and identifiable, for both legal and practical reasons. This makes the possibility of lending against art which remains "on the walls of" or otherwise at the borrower's premises, if not impossible, at least problematic. A traditional bank lender will almost always insist that the secured artwork is removed from the borrower’s premises and stored in a specialist secure warehouse on behalf of the lender (often packed and protected in accordance with strict stipulations) and clearly identified as being mortgaged to the lender. Most lenders simply cannot get comfortable with lending against a piece of art in situ in a country house or a family home because of the ongoing security, protection and possession issues.

There are, of course, some exceptions and certain borrowers have no intention of admiring their artwork at all, borrowing money against a portfolio of warehoused art, using the loan monies to purchase other pieces on which they hope to make a future profit. In this case the arrangement with the lender will usually include the ability for the borrower to remove artwork from the secured location in order to sell it at an agreed auction house, on the proviso that the sale monies are either used to pay off the loan or to reinvest in another piece of art to be provided as security. Other borrowers will be in the happy predicament of having an abundance of art allowing them to rotate assets in and out of the secured location at certain times during the loan period. Tax concerns will also affect how and where assets can be secured.

All of these complex structures and issues, coupled with the necessity to involve third parties such as warehousemen and auction houses in financing arrangements, mean that art financing can often become an expensive way of raising and lending money and led some banks to withdraw from the market after the crisis began to bite. However, in the current climate, where alternative financing is rapidly growing in popularity, some traditional lenders are beginning to dip their toes back into the art world. Other more creative financiers have been making their presence known by focusing on those borrowers who wish to keep their assets close, with some new finance providers promoting their ability to lend against art on the walls. Some of these new lenders are finding their offerings to be proving more attractive to potential borrowers than the products available from traditional finance providers and by promoting creative, more flexible or structured financing arrangements tailored more specifically to clients' needs, these new entrants are slowly seeing their visibility and market share increase.

Whatever Mr Wilde’s opinions on the subject, it seems hard to escape the idea that in a world where alternative forms of financing, security and investment are the bywords of a new generation of lenders and borrowers, art may well turn out to be very useful indeed to those who are prepared to be a little inventive with traditional structures and asset security.