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The Four Core Ways To Finance Your Film Project

Founder & principal attorney at Ahouraian Law, a full-service corporate and entertainment law firm in Los Angeles.

Very rarely are films financed through one single source. Especially at the independent level, financing can come in many forms, which can be tricky even for the savviest filmmakers.

As the founder and principal attorney at a full-service corporate and entertainment law firm based in Los Angeles, I specialize in corporate law, intellectual property, entertainment financing and negotiating and structuring artist and production deals. I’ve seen firsthand that while show business seems glamorous, it is also just that: a business. Even minor missteps in contracts and financing deals can be costly and laborious, which is why I’ve outlined four core sources of film financing that any aspiring producer should be aware of:

1. Private Equity Investments

Whether a private cash infusion comes from family and friends, institutional investors or hedge funds, private equity investing can happen anywhere during the production process. A producer, for instance, might have enough money from their personal network to begin production but might later need to raise funds for post-production and distribution. In those cases, a legal dossier, called a “private placement memorandum,” makes significant legal disclosures required under federal law and explains how much money is needed, how it will be used, and how the investor will earn a return.

With these types of investments, investors bet on the success of a movie early on. Unfortunately, independent filmmaking can be risky, and it’s important to ensure your investors are aware of this risk. If you’re raising private equity, it might also be time to consider working with a lawyer who has experience in film finance to ensure you avoid violating complex federal securities laws. (Full disclosure: My law firm provides these types of legal services, as do many others.)

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2. Presales

In a presale, the studio or distributor acquires distribution rights and substantial equity in the project before the film is made; then they commit to purchasing the film once it’s “in the can” and certain conditions have been met. One benefit of preselling the distribution rights is that the distributor is obligated to pay, whether the film is a commercial success. These deals usually factor in additional revenue splits and royalties after the distributor has recouped their initial investment.

The first step in gaining a distribution deal is to create a compelling presentation, a process known as “packaging” a film. This includes the script; bios for the director, producers and cast; and anticipated sales information. Having well-known talent and directors involved in the project is often key for presales. Additionally, keep in mind that some of the presold distribution rights may be sold in the foreign market, often territory-by-territory. In my experience, presales usually take place at film festivals, and lower-budget films are typically more difficult to secure presales for because they’re less likely to attract big-name stars.

A distribution deal might include cash advances to be paid upfront or in increments during the production process, with full payment made upon delivery. In that case, the deal is usually known as a “negative pick up” because the filmmaker is paid upon delivery of the completed film negative. However, a contract that commits a distributor to pay a certain amount when the film is complete is “bankable,” which means it can be used to apply for a bank loan.

3. Bank Loans

In addition to other financing received, a producer might choose or need to take out bank loans to finance production. Once a producer has presale commitments from distributors, they can then leverage those contracts to secure bank loans, which may constitute up to 75% of the minimum guarantee (the value of the presale contracts). When the finished film is delivered to distributors, the payments are due, and the bank loan is paid off from the amounts paid under the presale agreements. Banks require a completion guarantee prior to giving a producer a loan to ensure the completion and delivery of the film to distributors (thus triggering the payments).

Two other types of loans are gap loans and bridge loans. A gap loan covers the shortfall between what a film costs to produce and what it secures in presales; these loans provide between 10% to 20% of a film’s budget against an estimated value of all the distribution territories that remain unsold. (Banks typically loan half the amount of that estimate, in my experience.) Gap loans are often riskier than loans secured by presales, so banks can demand that they be senior to all other funding until fully recouped. They can also charge upfront fees and may require a completion guarantee.

A bridge loan, on the other hand, does not require a completion guarantee and can lend preproduction expenses until such time as a presale or gap financing comes through, at which point the bridge loan is paid off. Bridge loans are the riskiest and most expensive option, with some interest rates reaching as high as 1% per week and upfront fees of around 10%.

4. Tax Incentives

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Many states and foreign territories provide tax incentives to productions that film in their state or country, which can come in the form of a tax credit or deduction and vary by territory. In order to qualify for the incentive, each state or country will have certain requirements for filming in that state, such as hiring local talent. There are film commissions in most jurisdictions that will work with producers to ensure these conditions are met.

While filming a movie is a creative process, it is also a complex business endeavor with which many producers might not be familiar. As I mentioned above, even minor missteps can be costly, laborious and, in some cases, lethal to the project. Consequently, it’s wise for filmmakers to understand their options as they navigate the financing and legal logistics for their film.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

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