Edward Ruscha Pablo Picasso Marc Chagall Phillips de Pury Makes Its (Small) Mark Pompidou Plans a Roving Museum Ruscha Print Sets Record Sotheby's Scores Bilbao, the Sequel?

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At the Christie’s evening sale this May in New York, the Los Angeles-based artist Ed Ruscha’s metaphor-rich word painting Heaven and Hell, 1989, sold for $1,010,500.

That result was comfortably above the conservative estimate of $600,000 to $800,000 but painfully shy of the $1,248,000 the picture fetched at the same house in May 2006.

The price gap was a telltale sign of a distressed seller.

As it turns out, the owner, a 30-something West Coast collector, had pledged the painting as collateral for a loan from a private bank. The proceeds went directly to the lender to stave off a default.

It’s an oft-told story in these troubled times: As borrowers of all stripes find credit harder to come by, those with significant art holdings are using them as collateral for loans from private banks and short-term boutique lenders known as factors. In the process, they are changing the nature of this bespoke financial specialty.

"There’s been an increase in the number of inquiries for art-backed loans and in the size of those inquiries since September," says Andy Augenblick, president of Emigrant Bank Fine Art Finance (formerly Fine Art Capital), in New York. "And while we’ve always had people come to us looking for liquidity, we’re now seeing debt substitution" — that is, borrowing against art instead of real estate mortgages or securities-backed loans and the like.

"People are beginning to understand that these collectibles can be monetized and can be leveraged when they need money," says Ray Parker Gaylord, president of Artloan Financial Services (AFS), a five-year-old San Francisco venture that bills itself as the only Web-based private lender to the antiques and fine-art community.

Just as demand for art-backed financing is rising, however, supply is contracting. Except for short-term loans against upcoming sales, auction houses have pretty much departed the business and some private banks that had been active in the field are no longer active at all.

"If you came to me [a few years ago] with your family collection of Picassos or Chagalls, there were more banks and institutions willing to provide you with a loan based on your art as collateral," says Viola Raikhel of the London-based art advisory 1858 Ltd. "When the global financial crisis kicked in, several of these loan providers completely disappeared."

Today, besides Augen-blick’s Emigrant division, the major New York-based art-backed lenders are Art Capital Group (ACG), Art Finance Partners (AFP), Citi Private Bank, Rosenthal & Rosenthal, Sotheby’s Financial Services and U.S. Trust, Bank of America Private Wealth Management. In London, major private banks won’t make these loans directly, but some, like HSBC Private Bank, can guide high-net-worth clients to lenders via their art-advisory departments.

While the providers of art-backed loans, unsurprisingly, tout their merits, borrowers can find the process confusing, if not downright painful. "They make the terms so impossible and make you sign so many different pieces of paper, it makes it easy for them to take over the collateral," says one New York Impressionist- and modern-art dealer, who now taps collectors for financing. "If you contest something in the contract, there’s even a clause in there that says you’ve breached the contract."

Terms vary from lender to lender, as does the availability of funds. Many private banks treat art-backed borrowers like mortgage seekers, requiring extensive disclosures about income and net worth. But some lenders just want the value of the collateral to be two or more times the amount borrowed. At Emigrant, for example, qualified borrowers must put up $2 million to $3 million worth of art against its minimum loan of $1 million. The bar seems higher at Citi Private Bank, which makes art-backed loans available only to clients with net worths of at least $25 million, according to Suzanne Gyorgy, the head of Citi Art Advisory, in New York.