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Art Finance For High-Net Worth Individuals – Financial Services


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Following the emergence of art being used as a method of hedging
conventional investment portfolios in the recessionary and
inflationary years of the 1970s, art slowly became a more
established and accepted investment asset amongst retail and
institutional investors alike. As a consequence, during the art
boom of the 1980s, lenders developed debt products to allow their
clients (both art investors and art dealers) to borrow against
artworks held in their collections or trading inventory, or against
new artworks being acquired (as an investment or as new stock).
Fast forward to the present day, the art finance market has grown
significantly, particularly in the major global art markets and the
key art trading centres of New York and London. Since its
inception, art finance has become more formalised and sophisticated
as a result of market fluctuations, and art lenders now include
banks, debt funds, specialist lenders and auction houses offering a
range of financial products to high-net worth individuals
(“HNWIs”) and gallery owners, including bridging finance
to HNWIs.

Art finance – the benefits

The benefits of art finance to borrowers (usually HNWIs) are
similar to those of bridging facilities generally, including:

  • quick execution and funding;

  • freedom of use of funds;

  • reduced scope of due diligence; and

  • flexible terms and structures.

An art backed loan may benefit borrowers who are “art
rich” but “cash poor” by providing necessary
liquidity secured on an artwork or a collection of artworks for
specific purposes (such as paying a margin call on an equities
portfolio or paying inheritance tax on a deceased individual’s
estate) as well as borrowers looking to monetise their art
collections in order to make further investments (in art or

The term and repayment structure of art loans tend to be bespoke
and will vary depending on the needs of the relevant borrower and
the relevant lender’s credit criteria. That said, terms are
usually for an initial period of between six months and two years,
and common repayment structures include bullet repayments at the
end of the term (in which case any interest will be capitalised and
added to the principal amount of the loan), interest only (in which
case interest will be paid periodically and the principal amount of
the loan will be repaid at the end of the term) or amortising (in
which case interest and principal will be paid periodically
throughout the term).

Key points to consider:

  • Loan to value

  • Recourse/non-recourse

  • Possession

Loan to value

As with other forms of finance, in art finance, a loan to value
calculation is used to size the principal amount of the loan as a
percentage of the value of the artwork(s) being used as collateral.
In the majority of cases, to assess an artwork’s value, lenders
assess what a willing buyer would pay to a willing seller in an
open market. This is known as a fair market valuation
(“FMV”), which is undertaken by qualified and experienced
art appraisers who also confirm the authenticity of artwork(s).
Factors taken into consideration by FMV art appraisers include:

  • provenance (i.e. the ownership and exhibition history of an

  • sales history and track record;

  • marketability (e.g. the artist’s reputation/liquidity and
    the desirability of the artwork including its subject matter);

  • condition.

On a single artwork basis, the loan to value limit in
conventional art finance transactions does not usually exceed 50
per cent.

Recourse or non-recourse

Broadly, there are two types of art financing arrangements;
recourse and non-recourse loans. Both recourse and nonrecourse
loans are secured against a borrower’s artwork(s). However,
whereas under a non-recourse loan a lender’s collateral is
limited to the artwork(s) over which it has security (i.e. not the
borrower’s other assets), under a recourse loan, such loan is
also guaranteed by the relevant borrower (and therefore its other
assets). Recourse lenders therefore take into account a
borrower’s creditworthiness as well as the FMV of any relevant
artwork(s) in assessing whether or not to make a loan. As a
non-recourse lender will not have the benefit of a borrower’s
credit covenant if a default under the art loan occurs,
non-recourse loans are generally more costly when compared with
recourse loans in order to reflect the higher credit risks to
lenders in non-recourse lending.


Given the movable nature of artwork(s) and risks associated with
unauthorised disposal or damage, particularly if the financing is
on a non-recourse basis, most lenders require physical possession
of the artwork(s) being provided as collateral. Therefore, as a
condition precedent to a loan being made available, lenders (other
than in the United States in certain circumstances) will require
artwork(s) that are subject to security to be transferred to secure
third-party fine art warehouses (located in various jurisdictions
including the United Kingdom, Switzerland, Hong Kong and the United
States) in order to perfect their security.

It is, however, quite usual for artwork(s) being used by HNWI as
collateral to already be situated in a third-party storage location
(such as a fine art warehouse, freeport, museum exhibition or
gallery). Therefore, provided that such a location has the
necessary facilities and expertise to safely and securely store the
artwork(s), lenders may agree for the artwork(s) to remain in situ
if the third party enters into a tripartite agreement with the
relevant borrower and lender acknowledging and agreeing that such
lender can (and is authorised by the borrower to) take possession
of the artwork(s) should the relevant borrower default on the


Given the potential value stored in fine art, the speed at which
funding can be provided and the flexibility of the loan conditions
available, HNWIs are increasingly looking at their art collections
as an alternative source of liquidity and capital though art
finance arrangements.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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