This week, we discuss art financing with Freya Stewart at The Fine Art Group. In this blog, “we”, “our” and “us” means The Fine Art Group.
- How can art financing support the art trade?
In terms of our art trade clients, we work with dealers, galleries, auction houses and art advisors, providing them and their clients, with a range of bespoke art secured loans.
Galleries and dealers will often be sitting on substantial high-value inventory. Art secured loans offer dealers a means of releasing valuable working and investment capital from these artworks, giving them more firepower going into auction season.
Galleries selling at auction, or privately, with extended payment terms (they may not be paid for several weeks), often find advance loans useful. In such cases, we would provide a loan of typically 40-50% of the expected proceeds of sale, secured against the artworks contracted for sale. This provides the gallery with more immediate cash flow, ahead of the proceeds of sale being paid in full. This is particularly useful where payment has been agreed in tranches over a longer period of time. We have seen this as a useful tool for Asian buyers in particular.
Art loans in the form of purchase financing are another way in which we support dealers and galleries, by providing capital to close on acquisition opportunities. A dealer will identify an artwork that they wish to acquire (at auction or privately), and we will typically provide 40-50% of the purchase price directly towards the settlement of the invoice for the artwork. That newly acquired artwork then becomes a piece of loan collateral. Often well-priced acquisition opportunities require a quick sale, and swift financing to support a swift closing, can be useful.
Purchase financing is also a useful mechanism for galleries to support their clients in acquiring artworks offered by the gallery. For example, we have seen many instances where a gallery’s client is interested in acquiring a high value piece but prefers not to lock-up so much of their own equity in a single artwork. In such cases, the gallery may approach us to support their client in such an acquisition, by providing 40-50% of the purchase price by way of a loan secured against the artwork in question. This financing support may be the key to enabling the gallery to close the deal with their client.
Purchase financing is increasingly being used by galleries and dealers to support them and their clients in closing transactions. This kind of structure of loan is one we are seeing more often.
- And why might an art advisor find art loans useful?
We are increasingly working with art advisors, generally as more advisors become aware of the benefits of art financing to them and their clients. Similar to galleries and dealers, art advisors will identify off-market acquisition opportunities for their clients, which need to be closed quickly in order to secure the artwork. In such cases, art advisors often reach out to us, as we can provide 40-50% of the purchase price by way of a loan, secured against that artwork.
- In what ways can art loans support auction houses and how do you work with them?
There are many ways in which art financing can support an auction season. One way readers may be less familiar with is the use of art finance to support third party guarantees.
Some of our clients are significant third-party guarantors at auction, whom the auction houses rely upon to back-off their own guarantee risk to the consignor. By providing third party guarantors with financing terms, ahead of the sales, we offer the auction houses with additional comfort that, should our mutual client be called on their third-party guarantee (meaning their irrevocable bid or guaranteed bid is the winning bid), there will be no issue with the client performing on their obligations. This is also helpful for significant guarantors who may be guaranteeing multiple high-value lots in a single sale season, given they do not know at the time of agreeing a number of guarantees how many they will ultimately have to pay out.
For large single owner sales such as the recent Macklowe Collection, the auction house may have guaranteed a large proportion (if not all) of the works themselves, in order to win the sale mandate. In cases where the auction house becomes the owner of several guaranteed high-value lots (the lots do not sell and the auction house pays out the guaranteed amount to the consignor), an art loan against those lots can provide immediate liquidity whilst the auction house holds the lots as stock. This then allows the auction house to execute an optimal sale strategy over time. Entrepreneurial collectors have enjoyed using art finance for some time now, and the art trade is starting to catch-up.