If you are a collector of fine art, you likely have a clear understanding of what attracted you to each piece in your collection. You may even possess detailed knowledge about the artists’ personal histories and creative inspirations. However, you may not be aware that you can use your artwork as collateral to obtain a loan, which can provide liquidity to pursue various financial opportunities. These opportunities may include acquiring additional artwork, financing business objectives, or taking advantage of other prospects.
While you may have purchased fine art primarily for your deep aesthetic interest and passion, your collection may also hold significant financial value. The art market has experienced fluctuations in recent years, and collector interest has grown in both established and emerging segments, meaning the value of your collection may have changed over time. Utilizing a fine art loan may be a beneficial approach to release capital that can be utilized to achieve other objectives, such as acquiring more art or investing in cash flow assets.
Increasingly, affluent art collectors are taking advantage of low interest rates by borrowing against their valuable art collections, including pieces by renowned artists such as Picasso and Basquiat. However, this trend also increases the potential for a leveraged boom and bust in the art market. Although the larger banks currently dominate the art lending sector due to lower interest rates, art finance firms and auction houses are expanding their loan services to draw in more clients.
According to sources, Sotheby’s is leading the non-bank category’s efforts to provide art loans. The company’s art loan portfolio is estimated to be approximately $1B, and it claims that this figure increased by 50% between 2021 and 2022, which is impressive considering the challenges faced in 2021.
Additionally, the firm promotes its business by providing high-end buyers with a loan equivalent to 50% of the hammer price on purchases exceeding $2M at its auctions, with the entire process – from application to funding – taking only 30 days.
It appears that Sotheby’s may soon provide clients with the option to securitize personal loans secured by their art collections. According to Bloomberg, discussions about this service are still in the early stages. Meanwhile, Yieldstreet, an alternative asset investment company that acquired the specialist art-secured lender Athena in 2019, announced that its members invested $1B on the platform in 2022, which is their highest ever total. Athena reports that it has funded over $500M in the art-lending sector to date.
There are various types of loans available in the art financing industry, and different players offer different services. One type of loan is non-recourse, which means that if the borrower fails to repay, the lender cannot seize other assets belonging to the borrower. Borro is an example of such a lender, and it specializes in short-term financing for artworks and other assets. Borro’s interest rates vary depending on the size of the loan, with larger loans attracting lower interest rates. On average, the interest rate is between 3% and 4% per month.
By borrowing against your fine art collection, you can use the funds to purchase additional art or invest in other assets that have the potential to appreciate, which can help diversify your portfolio. Borrowing against a potentially appreciating asset, like fine art, can provide positive leverage to achieve asset diversification.
Additionally, art-related loans generally have lower interest rates compared to unsecured loans. Selling artwork at an inopportune time, such as when you are exhibiting your collection, can be avoided by taking out a loan instead. Furthermore, you may have a strong personal attachment to certain pieces in your collection and prefer not to sell them at auction. By taking out a loan instead of selling, you can avoid paying taxes on art sales that are not as tax-favorable as other asset classes. You retain ownership of the art and can still display it as usual. It may even be loaned out to galleries or museums, provided there are appropriate insurance, guarantees, and other agreements in place.
