Not short of a few bob: Marinus van Reymerswaele, The Money-changer and His Wife, 1540

The art-loan business is booming—or so it would seem from recent news. Today, Bloomberg reported that the collector and art magazine publisher Peter Brant has pledged 56 works of art from his collection to Sotheby’s lending arm, according to state filings. In its second-quarter results, Sotheby’s announced that its lending revenues were up 44% compared with the previous year (its total revenues were down 18%). Meanwhile, UBS, one of the more conservative global investment banks, has said that it can now offer to lend up to $150m against clients’ art.

It isn’t that art is suddenly looking safe enough to bet the house on (despite the spin of many in the market)—it is more that there isn’t much left to raise money against. Other lines of credit have dried up considerably since 2008, so finding alternative ways to access cash is increasingly popular. At the same time, blue-chip art has proved relatively resilient, which has come as a surprise even to many in the market. Recently, Sotheby’s chief executive, Bill Ruprecht, told Wall Street analysts that the wealthy are “[turning] to their art for liquidity, having exhausted other resources over the past four years”. But with often punishing rates of interest (ranging from around 9% to 25%; see box) for the borrowers and a risky underlying asset for the lenders, many wonder why anyone would enter into such an agreement in the first place.

In reality, UBS’s management is not risking its bottom line too much by offering to lend against art; quite the reverse. Rather than using its own money to back paintings, the bank will refer its interested US clients to Emigrant Bank Fine Art Finance (EBFAF), a privately owned lender, in exchange for a referral fee. Other banks do the same (HSBC has a similar relationship with the art advisory firm 1858), underscoring just how fragile this business is. If anything, the industry is less gung-ho than it once was, given the more stringent capital requirements on banks and some high-profile defaults (for example, when Art Capital sued Annie Leibovitz for non-payment of a $24m loan against assets including the copyright of her photographs; the terms were subsequently renegotiated). In any event, a borrower can only expect a provider to lend against around 40% of the value of the work—and with the exception of the bargain-basement lenders, such as borro.com, they don’t like to lend less than $500,000.

“Underwriters are far more comfortable lending against assets with a more liquid secondary market than art,” says Daniel Ross, who works in Barclays’s wealth and investment management division. His bank does not lend against art “as a rule” (although he says this would “not be impossible”) because of the difficulty of getting an accurate valuation. He asks: “Even when you have a market price for a work, what are the criteria for longer-term value? Is The Scream worth $100m?” (The work, by Munch, sold at auction in May for $119.9m to the hedge funder Leon Black). Suzanne Gyorgy, an art finance manager at Citi Private Bank, says: “It’s not just about lending. Private banking provides soft services that are important, such as advice on transport, condition, restoring—anything that is core to a collection.”

Even at EBFAF, which has a team of art experts including Nancy Harrison, the president of the Appraisers Association of America, its borrowers personally guarantee each art loan. In the US, this is not the case with, for example, mortgages on property. And even if approval for a loan is granted, it still may not get through. “Certain procedural standards [at a bank] can raise almost insurmountable barriers when it comes to finally authorising a transaction,” says Laura Battaglini Traversi, a director of the Zurich-based art advisory firm Waldstein Art Consulting.

Who borrows against art? As with most of the art market’s dealings, the details are murky, but there are certainly some people who need the money as a matter of urgency. Given that the trade in art is not always as brisk as some people need it to be, a loan is sometimes the best available solution. Others in the market are those whose main business asset is art: major collectors, art dealers and—when their boards allow it—museums. For the commercial players, art is their working capital, used to keep the business going. And often the flow of money is patchier than in faster-moving industries.

“If I could buy a Bacon for $10m today, which I?knew was worth $20m, but I needed $5m to get it, then taking out a three-month loan at 10% per annum interest would be what I would do,” says Philip Hoffman, the chief executive of the Fine Art Fund. Although, he adds, “to date, I never have borrowed money against art”. Such a financial bridge is common in the art world, says James Hedges, the president of the art-lending group Montage Finance. Lenders are keen to point out that this is a potential service for museums, which could bridge deals for acquisitions before getting the necessary funding rather than, for example, letting a work of national importance leave the country.

There is also the potential to speculate on the art market with a loan, although most caution against this. “It’s a commonly used fund management tool; if you know a market is going up, and you can get a lending rate below that percentage, then you take on leverage [ie a loan] to make a profit,” says the London-based art adviser Constanze Kubern. “Unfortunately, you cannot pin down the value of a piece of art as precisely as that of a daily traded commodity, and therefore [borrowing] can prove quite difficult when it comes to managing an art collection.”

The most relevant borrowers in today’s market—and those the larger banks are really chasing—are those who run small to medium, privately owned, financially savvy businesses (hedge funds, property companies and private equity firms), as well as other high-net-worth individuals with a broad range of investments. These are the people who are finding it trickier to raise money but have enough investments to repay a loan, should there be a need. Lenders do not have to rely on the art as the only form of collateral.

The big banks are more comfortable with arm’s-length lending, which helps them market to their all-important high-net-worth clients at little extra cost. “Bankers may be willing to have that conversation, but not many in the industry are really lending directly against art,” Ross says.

This is no bad thing for would-be borrowers. “In the case of insolvency, banks often have little choice but to liquidate the asset,” Traversi says. “This is not the ideal solution for the client, [and] it’s an inefficient process because the bank’s only obligation is to settle the debt plus interest, so often the work will sell for a price that is considerably lower than its market value.”