Question: I need liquidity and I am looking at taking out a loan against my stock, what are my options and what do I need to think about?
Answer: Banks in the UK have been traditionally reluctant to offer art-backed loans. There are several reasons for this including the difficulties associated with assessing and measuring risk, valuation issues, the illiquidity of art and the fact that unless the art belongs to a company, the lender must take possession of the art to perfect its security interest.
The pandemic has created a cash flow crisis for the art dealing community. Yet many art dealers are sitting on a considerable stock of art. Who can they turn to in order to leverage their stock to raise cash?
Some private banks lend against art, in the UK and the US. They include Citi Private bank, JP Morgan, US Trust and Goldman Sachs. According to Deloitte’s Art & Finance Report 2019, dealers constitute only 3% to 4% of their loan portfolio. This points to private banks being interested in lending to private collectors rather than businesses. If the owner of the business is himself a collector with his own private collection, the bank may consider lending against a blend of private and business assets. This assumes that the dealer is a client of the bank, and that the bank manages other asset classes for the dealer. Private banks are typically interested in the larger deals and are unlikely to being interested in loans below USD 5 million.
Emigrant Bank Fine Art Finance in New York will lend to the dealer community and unlike the private banks, they do not require assets under management. They are more agile and flexible, and they typically move faster than the private banks. Having said that, they are equally conservative, and require full disclosure of the borrower’s assets and liabilities, unlike many specialist lenders who do not assess the finances of the borrower.
Specialist lenders lend to businesses and collectors alike. They include Athena Art Finance (New York), the Fine Art Group (London), AOI Advisors (New York), Art Finance Partners (New York) and TPC Art Finance (New York). US lenders are generally prepared to lend to businesses in the UK. They will value the collateral at a conservative low auction estimate and will typically lend up to 50% of that value. With dealer stock, a 50% loan to value ratio is ambitious and dealers should expect a loan of between 30% and 40% of the lender’s valuation. This may come as a shock to art dealers who apply to their stock a significantly higher value. If the dealer carries on business through a limited company, in England the lender can perfect its security interest in the stock by registering a charge against it at Companies House, and technically, the charge is perfected as against other creditors and a liquidator without the lender having to take possession of the stock. Some lenders may want to take some items of collateral into their possession but allow the dealer to show the collateral to prospective buyers and if an item of collateral in the lender’s possession is sold, that item can swapped for another item. The cost of these loans vary, typically from a few percentage points with private banks to 6% to 12% with the specialist lenders. There is also a loan fee payable upfront, and some lenders charge other fees. Further, the borrower is responsible for the cost of putting the loan together, including due diligence and legal fees. Depending on the complexity of the loan, these costs can be relatively high. This means that loans against art often do not make economic sense unless the amount of the loan exceeds, say, GBP1 million. The time it takes to put a loan together also varies depending on the lender and the collateral pool. If the collateral pool consists of a few high value items within the same collecting category (e.g. Italian old masters), the borrower is well-organised and provides the lender with the required documentation promptly, and the lender is well-organised too, the loan can be disbursed in less than 30 days. If the collateral pool consists of a large number of items in different collecting categories, the process can take several weeks.
Firms like Oblyon can assist art dealers in finding the best loan. They can add value because they regularly deal with specialist lenders and they have access to other sources of funding that are not actively being marketed.
If you are a dealer looking for a loan against your stock, you will stand a better chance to obtain one at the best price if:
- You allow the lender to select the collateral from your stock;
- You offer the lender stock that is owned 100% by your trading company; you want to avoid a situation where the lender discovers half way through its due diligence that some of the stock you have offered is owned in part with other dealers;
- Once the collateral is selected, you assemble promptly the documentation required by the lender on the collateral;
- The company books are in good order and you or your accountant can provide the documentation on the company required by the lender without delay;
- You accept that the amount of the loan will be a small fraction of your own valuation of the collateral;
- You line up your insurance broker and ensure that he is available to liaise with the lender because the lender will want to check your insurance policy and be named as co-insured (possibly) and loss payee (certainly) on your policy;
- You accept that the lender may insist on taking possession of some items of collateral, and you are willing to work with the lender to find a solution allowing you to show those items to prospective buyers in the best possible environment;
- You accept that the lender may insist on a personal guarantee if it lends to a company;
- You retain legal counsel who is familiar with this type of lending, and who takes a commercial view.
To avoid nasty surprises:
- Agree with the lender upfront the costs of putting the loan together and negotiate a cap if you can. These costs can escalate fast;
- Find out in advance which valuer(s) the lender will appoint to value the collateral and ensure that the valuer is bound to keep the information confidential;
- Understand the lender’s rights if you default on the loan, as well as the lender’s attitude to default; avoid a situation where the lender derives an economic benefit from your default; understand if the lender can claim against other assets if the net value of the collateral in a forced sale situation is lower than the total amount you owe the lender;
- If the lender insists upon taking possession of some items of collateral, understand how you can get access to the collateral for viewings and what happens if you agree the sale of an item of collateral in the lender’s possession;
- If you give a personal guarantee, understand the risks involved.
Aside from loans against art, art dealers can explore lending options introduced by the Government to support businesses during the pandemic.
The Coronavirus Business Interruption Loan Scheme (CBILS)
The scheme is designed to help small and medium-sized businesses access finance during the pandemic. Under this scheme, a lender can provide up to £5 million in the form of term loans, overdrafts, invoice or asset finance. A facility can be granted for up to 3 or 6 years, depending on its nature. The scheme offers reduced upfront costs, as the Government committed to cover the first year of interest payments and lender charges, and a partial government-backed guarantee on each loan. More details on the scheme and a list of providers can be found here: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/
The Coronavirus Large Business Interruption Loan Scheme (CLBILS)
The scheme aims at facilitating the access to finance for medium-sixed and larger businesses affected by the pandemic. It is only available to businesses with an annual turnover of more than £45 million. Facilities include term loans, revolving credit facilities (including overdrafts), invoice or asset finance, and they can be granted for a period ranging from 3 months to 3 years. The finance is accompanied by a partial 80% government-backed guarantee against the outstanding balance of the finance. More details on the scheme and a list of providers can be found here: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/clbils/
The Bounce Back Loan
This scheme will help small and medium-sized businesses borrow from £2,000 to £50,000. Loan terms are up to 6 years. The main benefits of this scheme include the government’s full guarantee of the loan and no fees or interest to pay in the first year. The scheme is available from 4 May 2020. More details can be found on this page: https://www.gov.uk/guidance/apply-for-a-coronavirus-bounce-back-loan.