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The Art of Asset-based Lending

Posted by Wendell Brock on Fri, Feb 12, 2010

If art imitates life, then the burgeoning market of art-as-loan-collateral is a mirror of today's financial sector, of asset-based lending.

Last year, venerable portrait photographer Annie Leibovitz  called on Art Capital Group (ACG) for a $15.5M loan. Leibovitz's collateral? The rights to her entire photograph collection.

ACG only makes loans against an artist's or art patron's collection. Their website explains: "Unlike traditional sources of capital, we are comfortable utilizing fine and decorative art as the sole asset securing a loan or as a component of a collateral package."

And you thought the medical profession was specialized.

A preeminent photographer borrowing against her artistic catalog makes headlines (and blogs!), but asset-based lending and lending tailored to a business industry aren't new nor confined to the fine arts.

What is new is how popular this lending practice has become.

As Kyle Stock writes in the Wall Street Journal, "Asset-based lending, excluding mortgages, swelled by 8.3% to almost $600 billion in 2008, according to the Commercial Finance Association, an industry trade group. The association is still gathering data on 2009, but preliminary surveys show double-digit percent increases in lending. In comparison, syndicated lending in 2009 sagged by 39%, according to Dealogic Inc."

Interest rates for asset-based lending are typically higher than traditional loans, but still less than a credit card's terms. And if you can't persuade a bank to lend money through the usual channels-whether because of poor credit or the contracted credit market-then it's your best option.

Loans are made based on a business's accounts receivable, invoices, inventory, patents, and equipment. Most lenders require a detailed (and optimistic) business plan. But depending on the lender, businesses can use the cash for, among other things, acquisition, management buyout, recapitalization, growth financing, and turnaround.

Along with higher interest rates than traditional loans, asset-based loans also typically carry stiffer penalties for default, including a quick seizure of the collateral rather than a penalty. And if a bank has to liquidate assets, knowledge of the industry is very important.

Asset-based lending that matches a specialized lender with a customer-as with Leibovitz's loan-benefits both parties. The lender knows that what they're-literally-buying into, and the business gets payment terms that are tailored to their billing cycle.

Several banks around the country--both large and small--offer asset-based lending including, Bank of America, which offers several specialties, and is the asset-based lending industry leader.

According to the Wall Street Journal, the industry's biggest companies funded 23% more asset-based deals in 2009 as compared to the previous year.

And BOA, Wells Fargo, JP Morgan Chase, and TD Bank are all taking steps to expand their asset-based lending to stay competitive.

Whether this trend will continue remains to be seen. Much of it will depend on the default rate of these types of loans. Late last year, ACG accused Leibovitz of defaulting on her loan. Although ACG threatened a lawsuit, the issue was resolved last September without court proceedings.

Andy Warhol once said, "Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art."

Topics: Banking, Loans, asset, asset lending, asset-based lending

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