So, where do you begin? How do you find severe investors and funders for your feature film or documentary? Is it enough to have a wealthy uncle or movie-friendly dentist?
Fortunately, there is a road map for funding film projects and many others who have gone before you. It requires expertise, dedication, timing, and a little luck. A decent film screenplay with commercial potential might help you start collecting money, mainly if it includes one or two “known” actors, but the path to a fully-funded picture doesn’t stop there.
You may have heard of distributor presales, film tax advantages, and gap loans for production funding, but you may not understand how they operate or how to get them. We’ll look at all of those alternatives in the sections below.
But first, let’s speak about film equity funding, which is the predecessor to everything else.
Your Film Project’s Equity Financing
As a producer, you’ll most likely need to initially raise 30-50 percent of the intended film budget via equity financing. It’s termed “equity” because you’re selling ownership of the picture to investors who expect to recoup their investment (plus profit) when your indie film becomes the subsequent sleeper success at SXSW.
Private investors, such as family, friends, or local companies and film funds or grants from charitable organizations, might provide equity funding.
You may have executive producer associates who contribute their own or someone else’s funds. You may even bring finances with you but most filmmakers attempt to avoid funding their movies since they know they’ll be performing a lot of unpaid production labor.
At this point, the part of the budget you raise will most likely be a patchwork of monies from several sources. This is usual for indie films, and this increase may assist senior lenders, back-end private investors, and your bond firm gain trust. (I’ll go into more detail on bond firms later.)
You may alternatively incorporate the initiative as an LLC or corporation, which would enable you to offer securities to private investors, thereby generating funds in return for stock in the company. This ensures investors a part of the film’s revenues while reducing your share of the potential profit.
As the producer, if this is your production, you’ll want to do all you can to keep the corporation under your control.
Using a PaydayNow Loan to Secure Talent for Your Film
PaydayNow finance overcomes one key stumbling block you could encounter early in your film financing path. To get a prominent star, a crucial crew member, or a director, you’ll often need to pay a deposit to them and their agency up in advance.
How do you do it? Isn’t you need the project’s skill to obtain cash first? To get the finances, you must have talent. We’ve got a Catch-22!
A PaydayNow loan may help in this situation. You approach production investors who are interested in paying for your talent on the condition that their money is only issued to you once the talent commits. This reduces your investor’s risk while providing you with the promissory note you’ll need as security for a short-term bridging loan.
The investor’s pledged funds are released after the cash from the loan is in escrow for talent. You may now repay the PaydayNow loan plus interest. After taking care of it, you may begin debt financing.
3 Debt Financing Options for Filmmakers
There are various options for funding the remainder of your budget using debt financing after you have 30 percent or more of your film’s budget in cash plus any star talent to boot. Banks provide various production loans that assume a calculated risk based on credible proof that your movie will be finished successfully (a.k.a. collateral).
Debt financing allows the producer to earn more money than equity financing, albeit it’s not as simple to come by, and you’ll be responsible for paying it all back. Why is it more lucrative for you, the manufacturer, to use debt financing?
As long as the picture generates money, private investors get a part of the earnings proportional to their original investment.
On the other hand, banks earn money by charging a predetermined interest rate on the money they lend. They’re out of the equation after paying back, with interest, and you keep more ownership in the enterprise. Banks prefer controlled risk with predictable profits over being in the movie industry.
Let’s look at some of the many types of collateral you might use to get a loan for your project from lenders and banks.
1. Foreign territory pre-sale distribution rights
You may sell distribution rights piecemeal to different overseas areas via a reputable sales firm before you even start production, hence “pre-sales.” Those international distributors might pay the whole sum up advance based only on the merit of the screenplay and associated (or “packaged”) aspects like director and talent.
However, such pre-sales sometimes result in a small payment and a promissory note for the remainder to be paid upon completion and delivery of the final film. In these circumstances, you may use the promissory note as collateral to get a production finance loan after all, a pre-sale is useless if you don’t have the money to make the movie.
This method offers producers a better likelihood of profit, making it a standard way of film debt financing.
Side note: pre-selling overseas distribution rights are not the same as waiting until your picture is ready and receiving much attention at festivals. While you’ll need money to fund the movie right away, it’s also a brilliant idea to save your home market and a few major overseas regions for when your film premieres at festivals since such arrangements are nearly always more profitable.
For taking a risk on your idea upfront, foreign distributors earn a discount. They’ll offer you a “minimum guarantee,” granting them exclusive rights to screen your picture in a particular region. They often pay out the minimal guarantee after the item has been delivered.
2. Using a state tax incentive as a source of funding
State tax incentives are another excellent way to get the money you need before manufacturing starts. But, you may wonder, how is it possible? Isn’t it true that most film tax incentives only give you credit or a refund after you’ve spent the money in that particular production state?
Absolutely but with a well-vetted plan and reward application, financiers and lenders are willing to put up some of that money upfront in exchange for the incentive money when the project is finished.
It’s worth noting that you won’t get the whole amount of a state’s film incentive in the form of funding. The lender has to recoup their investment in your future incentive dollars, which they’ll include in the amount they’ll put up.
However, when working with a transferable tax credit, you must factor in a discount because you will be selling the credit on the open market to an in-state business. Depending on availability and demand, you (or your lenders) may only get 85-90 percent of the state’s advertised bonus. They’ll know the market rate and adjust cautiously, but knowing that helps you seem excellent ahead of time.
3. Financing to fill up the gaps in your film’s budget
You may still need to cover a financial shortfall. We have precisely the thing: a gap loan, which is a mezzanine loan, may substitute a shortfall of up to 10-15% of your overall budget.
Unsold, generally foreign lands and rights, are used as collateral in a gap loan. Don’t expect to raise funds this way by selling unsold domestic distribution rights since most banks consider this to be too risky. What is the reason behind this? Because the home market in the United States is so competitive, acquiring a distribution contract here is significantly more complex than getting one elsewhere. While there is still some risk involved, lenders are more inclined to lend against a more predictable market, such as a foreign nation, with a rate to match.
The gap loan becomes a super gap loan when the sum exceeds roughly 10-15% of your overall film finance package. This increases the bank’s risk, which means you’ll pay more interest and fees.
The good news is that you may apply for a senior loan using minimal guarantees from distributors, unsold territories and rights, and state tax benefits as collateral. However, lenders may still consider your idea too risky to fund. This is when your bond firm enters the picture.
When it comes to film financing, what is a bond?
Like a huge insurance policy, a film completion bond ensures that the loan is repaid, assuming the risk that the bank is trying to avoid. In essence, the bond ensures that the project will be completed.
There’s always the possibility that the bond company may “take over” your film if things go off track; however, this practically never occurs. The bond firm also does not wish to be in the filmmaking industry.
The bond business, such as Media Guarantors, a regular partner, will guide you through the complete bonding procedure. They’ll figure out the best payback schedule for you and offer you a total, including interest, fees, and closing expenses in your budget, bringing you closer to the net amount of money you may spend for the project.
With the bond in hand, you may pay off those bank loans based on distribution pre-sales and tax credits and apply for that last gap loan, allowing you to obtain the money you were promised on project delivery, as well as some cash from unsold areas, to spend in the project’s actual budget.
The Financing Cost
The cost of a production loan might vary from a half-point to several points. As a result, lenders will assess the project and production team based on the total loan facility, not only the loan amount.
The utmost amount a lender wants you to owe them, including interest and fees, is referred to as the loan facility. Because all of it is anticipated to come from the loan rather than the producers’ wallets, the money available to support your production will effectively be less than the entire loan amount.
Suppose you can work with an experienced production accountant to include your loan fees, interest reserve, and legal charges into your film’s budget. You’ll have a more accurate image of what you have available to spend, but you’ll also impress the lender.
Final Thoughts on Film Financing
Funding your film may seem to be a daunting undertaking that comes with several risks and rewards. However, there are several options for getting there, as we’ve seen. You can do it if you have the necessary knowledge and tools.