Types of Film Financing
Funds from film financing can come from a variety of sources and it is extremely likely that every film will use some combination of several of these sources in order to finance the film. First we must review the several sources of film financing before a more in depth view of the subject.
The major sources of film financing are equity financing and debt financing. Equity financing is typically represented by obtaining funds from outside the production company or for financial involvement in a particular project. It is extremely important to confer with a qualified, licensed attorney before embarking on your fundraising plan. This area is fraught with pitfalls. For example, if you are seeking funding from an individual or entity that you have a prior relationship with it is unlikely that you would be required to make any securities offering pursuant to SEC regs, however, if you are making what amounts to a public offering, then there are some very technical rules you must comply with.
The filmmaker may seek equity financing by selling the rights to exhibit and distribute the film, prior to the filmâs completion. The filmmaker may also obtain funding by obtaining loans (debt financing) so that cash is available for the project to more forward. Consequently, the difference is that equity financing is in the form of the sale of part of the intellectual property or rights relating to the intellectual property and debt financing deals with loans or credit.
Equity financing requires the filmmaker to sell an interest in a particular film or even part of the production company. The benefit of this form of financing (for the filmmaker) is that the filmmaker does not bear all the risk, as the investor is only paid if the film turns a profit. Consequently, because the risks are higher for the investor in an equity financing scheme the potential returns are much higher as well. For example, while a loan may charge 5% an investor may most everything if the film is a flop, but if it is a success, the investor stands to gain 40% of the profits.
Debt financing is characterized, just like any other commercial loan. A bank gives the filmmaker money in exchange for a promise to repay the loan, plus interest. With debt financing, the risk rests solely with the filmmaker, because the bank expects to be repaid whether the film is a success or not. However, because the filmmaker is responsible for the repayment of the loan, if the film is a success the bank has no right to share in the profits.
Of course the best situation would likely be for all of the costs of the film to be financed through equity financing, which would equal considerably less than all of the income, typically 25-50%. This is preferable because while the filmmaker will share in the profits of the film they do not take on any risk of a cash loss.
Film Financing Based on Distribution & Pre-Sale Deals
The motion picture industry is unique regarding these potential funding sources. A filmmaker may raise funds by selling securities in the film company. The filmmaker can raise funds by selling shares of stock in a corporation of membership units in an LLC, therefore, the amount of equity owned by individuals other than the filmmaker increases.
The filmmaker can also raise funds pre-production by selling the filmâs distribution rights. With this form of financing, the production company sells (all or part) of its distribution rights in exchange for a cash payment (present or future). For example, if a production company sells its rights to European distribution in exchange for $250,000, the future revenue earned by the film in Europe will be excluded, regardless of whether the film earns $2,000 or $2million. This structure of form of equity financing certainly reduces the potential pool of future revenue but it also reduces the potential risk of loss.
Pre-sale agreement or some of the more complex in the motion picture industry and often require the completed film be delivered prior to any payout. Consequently, this often causes the filmmaker to then borrow from a lender, such as a bank, in which they use the pre-sale agreement as collateral for the loan. Because this format allows the filmmaker to finance the project without personal funds it remains very popular.
Pre-sale and distribution deals can vary considerably.
Unless the film is being sold, in its entirety, to a studio, the production company must still control costs and pay bills as they become due. While the filmmaker may have sold the right to distribute the film, or the copyright in the completed film, these do not convert into funds available for production. Rather the filmmaker must apply to a lender to obtain the cash necessary for the production.
In applying for a commercial loan, the production company must show that it is able to repay the loan, evidenced by collateral. Since the film has not yet been produced, this collateral consists of the screenplay, including any story rights; the production budget, including a schedule for the use of the proceeds as they are paid to the filmmaker throughout the production; any legally binding commitments by key personnel; and legally binding guarantees for the territory sales or alternate financing arrangements. These contracts must specify the guaranteed minimum the filmmaker will be paid, and that amount can be used as collateral to be pledged against the value of the loan.