Film financing is one of the most arduous challenges of independent filmmaking. Raising capital requires proper research, compliance with applicable law, and frequent involvement of experienced entertainment attorneys. This is especially true as the amount of necessary capital increases for films of larger scope. With this in mind, there are typically four categories of financing available: self, debt, equity, and advanced sales financing. Each category provides particular benefits and challenges for the filmmaker.
The most direct and infrequent form is self-financing: the simple use of one’s own cash for production purposes. In fact, one of the main sources of personal financing for an independent filmmaker is discretionary income. However, the challenge in discretionary income is that most independent filmmakers simply do not have enough and must rely on additional funds to achieve their goal and vision. As such, a great alternative for both new and experienced filmmakers lies in donation based financing. Companies such as Kickstarter and Indiegogo provide effective tools to fund creative projects. The idea is simple: set a goal and people who like the idea can pledge money to make it a reality.
Alternatively, with debt financing one may take out loans to cover production costs. A lender, typically a bank, will give the borrower money in exchange for a promise to repay the loan plus specified interest. There is a certain level of risk involved for the borrower because, whether the project succeeds or not, the lender demands full repayment. One can expect the filmmaker to be personally liable for such repayment in case profits from the film are insufficient to cover the borrowed amount. The benefit is that the lender’s profit will be a fixed amount, so the more successful the film, the greater the potential for overall profits for the borrower.
In contrast, equity financing allows an investor to receive money only if the particular film yields a positive return on investment — in a subsequent blog we will show that film subsidies (tax incentives and credits), and pre-sales (discountable-contract finance) from foreign distributors, could help to mitigate potential losses. The more successful the film, the more cash the investor will receive. As such, equity financing reduces potential losses for a film project, but simultaneously reduces potential profits. This is opposed to debt financing, where profits are nearly maximized while the risk of loss is placed entirely on the filmmaker.
Lastly, advance sales financing allows a filmmaker to raise funds by selling the film’s distribution rights. Unfortunately, it has become increasingly more difficult to pre-sale a particular project since many distributors will only buy a project once completed. Since many sales distribution rights do not automatically result in cash, the filmmaker must borrow from a lender using such pre-sale agreement as collateral — the film’s distributor may serve as guarantor. It is only natural that the more well established the distributor, the more likely that a lender will initially finance the project. However, the amount likely to be raised will vary greatly based on the cast, producers, directors, and distributors involved.
Clearly, there are a number of ways to finance your dream project, yet each way provides unique challenges and risks to manage. Regardless of such means, it’s efficient to work with an attorney in the field to determine your overall risk sensitivity and best option.
