German Startup Brings Finance Industry's Fast-Cash Option to ...

Imagine that a young gallerist shells out $13,000 for a booth at an indie art fair like Volta or Independent. Tack on another few grand for food, flights, shipping, and hotels. If all goes well, he or she sells enough art to recoup the expenses ? maybe even turn a profit ? before going home, unpacking, writing up the invoices, and then waiting for the checks to come in.

But, as any cash-gutted dealer in this situation knows, that can take weeks or months. In the meantime, rent still has to be paid, as do day-to-day operating costs and any fabrication expenses. The artists must wait even longer.

It's a gamble that can easily topple a business, and the art trade is unique for operating without a net. For almost any other company that issues invoices, the financial sector already offers a solution. It?s known as ?factoring,? and is common practice in many professions, but largely unheard of in the gallery world.

The way it works is that a third-party company advances payment to a seller while directly invoicing the other ? a little like PayPal, but with higher stakes. In recent years, the art market has increasingly come to embrace finance industry models, creating its own art investment banks and lenders, such as ArtAssure and PlatinumArts. Now, a German startup called Foundation wants to be the first to bring the traditional factoring framework long used by mainstream companies like Rosenthal & Rosenthal to the primary art market.

?It?s an incubator for a certain kind of gallery,? said Foundation co-founder Ulrich Voges, who also launched Volta in 2005 with Amanda Coulson. Established galleries don?t need extra capital, and private lenders already exist to serve the blue-chip secondary market. But, to date, no entrepreneur has risked advancing cash to the lower-end galleries on the primary market.

?What?s important to these galleries is cash flow, the liquidity,? Voges said. ?What you really need on your daily basis is always something you have to fight for."

So far, Foundation, which Voges founded alongside Coulson, Karl Rheinberger, Tobias Kirchhofer, and Philipp von Ilberg, has raised ?800,000, and plans to be operational with that budget in time for Art Cologne in April. At that point, any of its 100 member galleries can approach Foundation on a deal-by-deal basis and, if it approves the sale, the gallery will receive a 90-percent advance within 48 hours. Foundation keeps 3.8 percent for itself ? slightly more than what a credit card company typically charges merchants.

"The introduction of factoring to the art trade is such a no-brainer that one wonders why no one has done it before," said Joost Bosland, a director at Cape Town's Stevenson gallery, which has signed up for the service. Once, Stevenson sold a sculpture at the Armory Show to a collector who picked up the work at the end of the fair, but never paid for it. "Eventually we physically went to their premises to collect the work more than a year later."

?I would have used it when I began,? said Patricia?Asbaek, who opened her Copenhagen gallery in 1975. ?We more or less all started from scratch with a lot of good ideas and?great artists and young collectors. It was a hard job to survive and I would really have appreciated a special art bank to support me.?

If all goes according to plan, Voges expects to work with upwards of 1,000 international galleries in the next few years. For now, however, its business is restricted largely to the euro zone since it does not yet meet U.S. trade regulations. American galleries have signed up, but can only use the service for deals with foreign collectors.

?I do think there?s a need for it,? said art financier and ArtAssure president Asher Edelman. ?This is not a very good cash-flow business.? But, he added, Foundation?s 3.8-percent cut seemed steep to him, and he doubted that most of galleries' transactions really take longer than a month.

Then again, backing untested artists brings sizeable risk. Unlike art that has already gone to auction, work on the primary market cannot be objectively valued, which is why factors have typically stuck to commodities: tradable products that they know they can repossess and sell if a client defaults on payment.

If a buyer doesn?t pay Foundation after three months, which Voges thinks is unlikely in this industry, it too will repossess the artwork.? But whereas traditional factors wouldn't want to touch such an asset, Foundation thinks its backers have experience in the art world that renders them uniquely suited to handling work of more indeterminate value.

?There?s probably no alternative? for factors in this price range, added Edelman, ?so maybe it is fair. If it?s only dealing in $20,000 pictures, then maybe it?s not too expensive.?

A potentially more controversial aspect of the business is its aim to create a primary market price database. Over the next three years, Foundation plans to compile sales information collected from members, which its marketing materials say will ultimately be ?desirable for many groups and other providers in the field in terms of screening this high-potential market.?

But Voges was quick to downplay the database: ?It?s almost a derivative of what we are doing here,? he said, and the information will be analyzed only ?in an abstract way.? He knows that dealers get squeamish when it comes to talking about money, and few want to see private sales information go public, so he stressed that, overall, the business ?is actually something quite beautiful because it extracts a crucial part of the relationship between gallery and collector, and that is the money, and that is when it can become uncomfortable.?

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Source: http://www.artinfo.com/news/story/878308/german-startup-brings-finance-industrys-fast-cash-option-to

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