Art-secured lending takes two main forms, recourse and nonrecourse. Private banks typically offer recourse loans, meaning the art serves as collateral for the loan but the borrower also has to give a personal guarantee of repayment. That means if the borrower defaults and the bank can’t recover the full amount of the loan by selling the art, it can make a claim on the borrower’s other assets.
A host of smaller lenders, such as Borro, Art Capital Group and Falcon Fine Art, have started offering nonrecourse loans, which don’t require the borrower’s personal guarantee. “With nonrecourse lending, the only asset that is the security for the loan is the artwork itself,” says Paul Ress, founder of Right Capital Ltd., which offers advisory services and arranges nonrecourse loans. “Obviously, in those instances the creditworthiness of the individual is much less important than the art itself.”
Mr. Ress says the private banks typically offer much lower rates on recourse loans, because the lender’s risk is lower and the banks view the service as part of an overall relationship with a wealthy client. Borrowers may be able to get rates as low as 2% or 3%, he says. For nonrecourse loans, interest rates vary widely but typically range from 8% to 16%, Mr. Ress says.
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