The Basics of Financing an Independent Film
I’m asked frequently about the best way to finance a small budget or independent film. There is no one, best way, but many potential avenues to take. Whichever route it turns out to be, it’s usually an arduous journey that always requires proper due diligence and compliance with all relevant legal requirements. In general, there are four usual ways to obtaining independent (i.e. non-studio) financing: debt, equity, advance sales and funding by personal means.
Debt financing works the same way other debt financing is structured for commercial loans in other industries. For film, the producer or producers of the picture takes out one or more loans to fund production, and the lender, in return, will require repayment of the principal loan amount plus interest. There is stability in this method of financing since the entire amount of production (which should nearly always include pre-production, physical production, and post, as well as release or distribution expenses if necessary) can be secured via one or more loans. There is significant risk for the production team as well, since all loans must be repaid, regardless of the completion of the film or the success of the film if completed. Considerable risk is assumed under the debt structure as well, because nearly all finance loans will require the personal guarantee of the producer.
Equity financing is the opposite of debt: in exchange for funding the financier will take a share of the positive return of the picture, if any. This type of funding can offer the same security in having the money to complete the film and provide some leverage in the negotiation for better terms with the third party distributor. A significant amount of risk regarding the completion and success of the project will be shared with this investor-equity partner. If the project is a success, the potential upside is quite significant, which is often the biggest enticement for this type of investor.
Pre-sales or advance sales allows the producer to raise capital for the project by arranging distribution of the project, and receiving an advance of such sales income, before it has been produced. The distributor in this scenario will almost invariably obtain production approvals over material aspects of the film, from the above-the-line talent to final budget. Large distribution fees are also the norm. While this is a well-known way to finance a picture, it’s very difficult to secure advance sales with a little known producer; many distributors these days require a completed film before they will purchase it in today’s market. Further, like negative pickups—where an independent producer will enter into an agreement with a studio who will purchase the movie if certain targets are met—advance sales more frequently do not provide all of the capital to complete the picture, but rather can be used as collateral to secure other financing, typically debt. The structure of this arrangement varies significantly based on the producers, talent and distributors involved.
Last is self-financing, where the producer will use her or his own money, money from family or friends, to finance production. By and large most independent film producers don’t have enough discretionary income or savings to fund a film completely, so this type may be combined with others above. The rise of crowdfunding has had the single largest impact on small, independent film production in a generation. Producers must use extreme caution here: while donation-based or reward-based crowdfunding may not require compliance with SEC public offering law, participation-based crowdfunding, where the investor obtains an interest in the profits of the project, certainly will.
An experienced entertainment attorney will provide important guidance in choosing the correct type of financing or combination. As with all blogs on the site, this is for general information purposes only, and each person should seek direct counsel regarding the specifics of their given situation. This blog is not an offer to represent the reader.
