Art Market

5 Reasons Why Many Art Dealers Can’t Get a Loan—and Might Not Even Want One

Anna Louie Sussman
May 4, 2018 2:44PM
Alec Monopoly
Richie Picking Monopoly Watering $ Tree, 2018
Eden Fine Art

Mobile phone companies like Sprint and T-Mobile are valued in tens of billions of dollars from investors, who know the companies have millions of consumers who commit via contract to paying the companies a steady amount of cash each month. Art dealers, by contrast, have a tiny consumer base, and those consumers are not known for adhering to prompt payment schedules.

Cash flow in the art business is irregular, which would theoretically make dealers a ripe target for the growing art financing sector, through which art owners can borrow cash against valuable works. That money could be used to pay bills during fallow periods, fund an opportune acquisition, or expand and grow the dealer’s business. But a report out Friday from The European Fine Art Fair (TEFAF) on art financing finds that dealers account for under 10% of the estimated $20 billion art-secured lending industry.

The report—prepared by Anders Petterson, founder and managing director of ArtTactic, a London-based art research consultancy—interviewed 142 dealers who participate in TEFAF art fairs (its New York spring edition opens Thursday). TEFAF’s fairs are known for their strict vetting and attract some of the most prestigious and established dealerships in the world, so the findings are likely not generalizable to the entire art market, which includes many small and emerging contemporary art galleries. But the report found that over one-fourth of dealers said a lack of access to credit had hampered growth, suggesting some unmet demand for financing. Here are five takeaways from the report.

Dealers are surprisingly fiscally conservative

An overwhelming majority of dealers (90%) said they finance their operations through retained earnings, or profits that are reinvested back into the business. Nearly two-thirds of dealers said their debt-to-asset ratio—the amount they owed compared to the value of their assets, such as real estate or inventory of art—was less than 10%, and 56% of dealers said they had no debt at all. In the U.S., 11% of dealers said they had taken out a commercial loan, while 6% said they had tried to access one, but failed. The numbers show that dealers are keenly aware of the up-and-down nature of their industry, and are reluctant to take on debt. In the event of a market downturn—or even just due to the unpredictable nature of the business—dealers know they might be unable to repay, given that art is an illiquid asset (or difficult to easily and quickly sell at full value), especially when the market is down.  

There is still an appetite for credit

Larger art dealers with regular cash flow can access commercial loans from banks; some dealers have relationships with private wealth managers; and many turn to private investors to, say, co-invest on a painting they believe they could sell at a profit. They may ask another dealer to split the price of a work coming up at auction, with a resulting commitment to share the profits after its result. The report notes that a dealer going solo on such a painting could reap higher upside, even if the cost to borrow was relatively high (of course, this is also riskier, because the dealer doesn’t share the risk with another investor). “All things being equal, if a dealer could borrow half of the acquisition cost at 9%, rather than bring in a partner with whom he/she has to share 50% of the profit, the dealer would keep 91% of the profits of every transaction rather than only 50%,” the report states.

Mistrust on both sides hampers art lending

Unless they are specialized art lenders, financial companies tend to be wary of art dealers as lending prospects for several reasons: The challenge of valuing art works to be lent against; dealers’ irregular cash flows; and the potential to lend against a work that turns out to be fake, or has dubious provenance or an unclear title. (See, for example, a recent case in which the dealer Anatole Shagalov is alleged to have borrowed money against a work that was part-owned by Paul Kasmin Gallery.) Dealers, too, don’t seem to trust lenders. Thirteen percent said they “didn’t want the parties to the lending transactions to have proprietary information about [the gallery’s] inventory.”

Legal frameworks are key

The U.S. has a strong regulatory framework that other countries would do well to emulate. Its Uniform Commercial Code (UCC) governs commercial transactions across the country, making it easy to do business across state lines under a single legal framework. The UCC also contains a provision that “allows the borrower to keep possession of the art works while the loan is still outstanding, which could be of great advantage for dealers,” the report states. “This makes this type of financing significantly more attractive than for countries where the lenders are more likely to take physical possession of the art work.” Lenders in the U.S. record the artwork against which they are lending in a public registry, much the way a mortgage is recorded as a public record, allowing homebuyers to move right into a new home even though the bank may still own 80% of it.

Greater market transparency could iron out the lending process

More data, transparency, and potentially technological solutions, such as blockchain, could help expand art-secured lending amongst dealers. Nearly one-third of dealers, or 31%, said they were interested in art-secured loans, but were concerned about high interest rates (which can go into the double digits) and the time it takes to underwrite the loan. These concerns could be assuaged by having more data (such as art pricing indices) and transparency, which could allow for more efficient underwriting and pricing of the loan. As for establishing ownership and title—another sticking point in the loan underwriting process—the implementation of blockchain technology in the art market could help alleviate concerns over title.

Anna Louie Sussman