You went to film school, not business school—yet all the sudden you’re confronted by a bevy of fancy financial terms as you attempt to assemble your independent film’s budget.
Rather than pretend to understand these terms, check out this quick primer to ease your anxiety. Funding indie films almost always requires a piecemeal approach. Some of the most commonly assorted pieces used to cobble together a budget include:
• Crowdfunding: Donor-based financing
• Development/Bridge Loans; Film Loans: Collateralized by territorial pre-sales
• Tax Incentives: These may need to serve as collateral for a loan when cashflow requires the money sooner than the government payout of the incentives
• Passive Equity: Often from investors contributing via a Private Placement Offering
• Active Equity: From co-production relationships or in-kind coproduction deals, such as a post-house providing services in exchange for profit participation
• Traditional Loans: Secured by a letter of credit or other tangible collateral, such as a mortgage on the producer’s home. This is the least preferred source, given its risk.
Avoid Equity Investment Crowdfunding
Title IV of the JOBS Act allows for an equity investment component to exist for crowdfunding, and opens the doors for non-accredited investors (i.e. low net worth) to invest in projects via crowdfunding, where potential profits are promised to crowdfunders. While some indie moviemakers have touted Equity Investment Crowdfunding (EIC) as a system that works, the reality is that regulations governing EIC are cumbersome and often cost-prohibitive, given the amount of cash you’ll need to expend to be in full compliance.
Donor Crowdfunding is effective for the limited purpose of raising the funds necessary to kickstart a project. Generally, Donor Crowdfunding works best when raising a small amount equal to the minimum Development Funds required to advance a project. This will raise just enough to finish a script, draft a budget, and place a key actor on hold for future services. Donor Crowdfunding also provides early identification of grassroots fans, who can generate buzz about an in-development project whose social media presence can be further monetized upon your film’s release.
It’s a myth that wealthy philanthropists are surfing the web to make random donations to projects with which they have no prior affiliation. Rather, your likely contributors are friends and family. Because every dollar counts, this source of money from willing friends and family shouldn’t be overlooked, particularly when the ask is kept small and designated for specific development purposes.
These are sometimes called “Bridge Loans,” in that the loan “bridges” the cash flow gap that producers have—likely caused by the need for early start-up funds in order to cover the full budget. Like Donor Crowdfunding, Development Loans work best when used to raise early funds that’ll secure what your film needs to get greenlit. Development Loans can help bring your first investors aboard—even when nobody wants to be the first investor in any project.
Development Loans are attractive to investors because they are paid back from the first drawdown upon raising your full budget—usually at the start of pre-production. Conversely, your film’s early investor wouldn’t see payback until revenues from the finished film were received (if at all). If the producers fail to raise the full budget for the film, generally, the Lender for the Development Loan will often insist on a lien on the copyright of the script, so if the film is ever made, the lien must be paid off first (and this lien is recorded with the copyright office as part of the chain of title attached to the script).
Loans Backed by Pre-Sales as Collateral
Loans backed by Pre-Sales are yet another form of Bridge Loan. The Pre-Sales are sale contracts promising to pay a set price upon delivery of the finished picture to a particular “territory” or country throughout the world. Because Pre-Sales payments are contingent upon delivery of the finished film, the Pre-Sales contracts serve as collateral for lenders specializing in making loans that provide cash for the budget.
In order to qualify for a loan backed by Pre-Sales, the film must be of a nature that can generate sufficient interest to obtain bona fide Pre-Sales via a sales agent. Certain genres and certain actors perform better than others on a worldwide basis. Reputable sales agents and repeat players in the industry can help you identify what scripts and actors work best to obtain Pre-Sales. The Pre-Sales are brokered by foreign sales agents who are generally based in the U.S. but hold relationships with buyers around the world.
To obtain a Pre-Sale Loan, you will also need a reputable banking institution to act as a lender. Most established bankers and private lenders that specialize in this arena are well known within the independent film industry. There are a number of other private lenders that pop up from time to time with promises of funding a film project with elaborate, hard to understand financing schemes—these are in fact, scams. A common scam is for these fraudsters to provide some opaque explanation as to why money must be advanced by the producer to the lender who in turn gives the producer at a later date a far greater sum in the form of a loan. If the terms don’t make sense to you or your attorney, the terms probably don’t make sense—especially if the people are promising what no other legitimate recognized film lender can promise.
Finally, in order to secure this type of bank loan, you will need to obtain a Completion Bond (and all of your Producers, Directors, Actors, UPMs, Accountants and Attorneys on the project must all be deemed “bondable” by the Bond Company). Remember, the Pre-Sales (the collateral) only have value if the film is finished and delivered. If the film goes over budget and cannot be finished, the Pre-Sales are worthless, and the Lender may lose their entire loan repayment. For practical purposes, a completion bond acts as insurance, although technically, the bond is a “guarantee” not an insurance policy.
Tax Rebates and Tax Credits
Tax Rebates are cash refunds paid directly for every “qualified” dollar spent in the state during a film production. Tax credits, on the other hand, are like an “IOU” processed through tax returns and work as a dollar-for-dollar reduction on your company’s income tax liability. Since most producers are out-of-state production companies that do not pay tax in that state or in which filming occurs, the tax credit or IOU from the taxing authority will only be valuable if they are “fungible” meaning they can be sold (at a discount) to taxpayers in that specific state.
When dealing with tax incentives, remember that you won’t see this money until after the production is wrapped, so if you are using it to help fund the production, you will need a bridge loan with the tax incentives acting as collateral to cover the gap that exists between when you need the money and the time you receive the tax incentive cash. You will also need to strictly comply with government regulations in order to fully take advantage of these programs. One mistake that producers make is failing to understand the rules of each state’s tax incentive program before filming begins.
Equity money remains an essential component of independent film financing at all levels. Equity investment deals can be identified by many different names: Co-production Agreements and Collaboration Agreements are often the names for Active Equity partnerships. Financing Agreements and Private Placement Offerings are often the names for Passive Equity investment deals. Equity investment deals generally involve the creation of a Single Purpose Entity, which can be a partnership, joint venture, corporation, LLC, or other commonly used type of entities.
Passive equity investments require use of a Private Placement Memorandum, and the individuals that invest have no say in how the film is made. Rather, they simply invest, show up at the premiere, and if there is a profit, they will get their share. By contrast, Active Equity investors are production partners that have a real say in how the film is made and work to some extent side by side with the other producers.
Traditional Bank Loans Secured By Letter of Credit
Sometimes despite using all of the above modes of financing, a producer still comes up short. In such cases, a Traditional Bank Loan is necessary. This should be used as a last resort, only where all other options have been exhausted. A Letter of Credit from a credit-worthy individual can be given to act as collateral. The hope is that the traditional loan will be paid back from the revenue stream of the picture from domestic sales or other deals that were not subject to a Pre-Sales agreement. The risk associated with this financing mechanism is that the issuer of the Letter of Credit may be on the hook for the full amount of a traditional bank loan in the event the picture is not a success.
Film financing is a juggling act, and like juggling, it’s its own art form. Each of these financing mechanisms can be used to cobble together your film’s budget, and each presents their own unique set of challenges and traps for the unwary. When navigating this terrain, make sure you have qualified film financing counsel to fill in your knowledge gaps. MM
This article appears in MovieMaker’s Spring 2018 issue.