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The Definitive Guide to Independent Film Financing Part Two

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This is the second of my 2-part series on independent film financing. You can find part one of this series that was posted last week here.

I am creating this series to help all those talented independent filmmakers out there. Maybe that’s you or maybe that’s someone you know well or have worked with in the past.

One of the biggest struggles for most up and coming filmmakers and directors no matter how talented they are is to find that early financing for their work.

While this is a challenge for sure, there are some great options and alternatives to help you if you know where to look. After reading this series and this blog post you will have some great information on how to get that financing you need to kickstart your filmmaking dreams!

Let’s jump right in…

Last week we talked about personal loans, crowdfunding, pre-sales through sales agents, tax credits, bank loans and equity financing.

This week I’m going to give you 3 little known but very effective ways to finance your film.

 

Deferred Compensation For Film Financing

Now this may not seem like a fundraising method, but by reducing the net amount of cash you need to make your film, or your cash budget, you are effectively reducing the amount of funds you need to pay out before your film is released.

How it works is: The talent, cast, crew, and even directors agree to have their fee paid part up front and part on the back end, such as from net proceeds from the film, or as a bonus when a certain event occurs, like when a box office income target is reached.

A studio will still want you to claim the entire agreed upon compensation in your budget so that the numbers are not misleading since you have a contractual obligation to pay the entire compensation.

 

Product Placements To Fund Your Film

Another way to fund a project is through Product placements, where you display products, brands, or logos in your film in exchange for some form of financing. Product placements have been a common source of finance for big-budget movies, and indie producers are increasingly using this funding method.

These deals will specify things like minimum number of seconds or minutes when the product must be clearly visible on screen, and sometimes there are maximum number of uses so the product is not see as being overexposed.

Brands contribute in different ways.

1. Money towards production

2. Payments of marketing and promotions that benefit both parties, or

3. In-kind, meaning products or services are donated to the film, like cars, food, or computers.

The monetary benefit to this is that the producer does not have to buy the products for the film.

 

International Co-Production Treaties For Film

In many countries, production companies take advantage of international co-production treaties. This is where a production company located in one treaty country receives the benefits from another treaty country, meaning they are not subject to the additional red tape and cost that a typical foreign company would be.

For example, the production company would have the ability to hire workers without incurring the premium wage that a foreign company would have to incur.

An example of how this works well is in animation with Canada and France. France has some of the top stop animation studios and Canada has attractive tax incentives so production companies have been benefiting from the co-production treaty between those two countries.

Unfortunately, the U.S. has not entered into any international co-production treaties where each country can benefit from one another.

 

Bank Finance Terms For Film

Lastly, I want to just mention a couple of bank financing terms that help finish your project.

A completion bond is Insurance that is triggered when a project goes over budget and needs extra funding to finish.

The counter type of bank financing is Gap Financing, which is a loan that provides the finance for the shortfall (the gap) between the finance raised, and the total budget amount needed to make the movie.

The project has not secured funding equal to the Completion bonds: A form of insurance, which guarantees financing to complete a film in the event that the producer exceeds the budget.

Completion bonds are sometimes required by banks to secure loans and investments in a production.  Should a bond be invoked, the completion guarantor may assume control over the production and be in a recoupment position superior to all investors.

• Is insurance taken out by the Producer to guarantee that the film will be completed on time and on budget.

• The producer will have to send daily and weekly reports to the bond co.

• The bond co. will require rights of “take-over”

• If the Producer is having problems or finds it impossible to finish he film, the bond co. can step in and replace the Producer, director..etc. and manage the project directly.

 

Gap Financing

• Is a form of loan, usually from a bank, which provide the finance for the shortfall (the gap) between the finance raised, and the total budget amount needed to make the movie.

In many cases, there is a gap between the amount of money that is guaranteed under distribution K’s and the actual production loan for the film.

• A gapping bank will lend against the projected sales estimates relating to unsold territories

• The bank will only lend if:

• 1. it is satisfied with the reputation of the sales agent providing estimates,

• 2. if the sales agent s attached to (committed to sell) the project and

• 3. sees that one or two pre-sales have already been made to “major” territories (Germany, UK, Australia)

Direct Support (not necessarily nonprofits)

• There are countless organizations all over the world offering an assortment or grants and awards

• Usually a committee or panel decide on the merits of the application.

• You must meet tight qualification criteria.

Below is a more condensed version of the information in this blog post on video.

I hope you enjoyed this 2 part series on Independent Film Financing.

Next week I am really excited as we are going to be talking about Private Placement Memorandum Offerings for Film, otherwise known as nowadays as Equity-Based Crowdfunding. This is really the advanced ninja stuff for raising money for your Entertainment projects and you are not going to want to miss it. Make sure you subscribe to lawyersrock.com so you don’t miss out!

Ill see you next week!

Rich
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The Definitive Guide to Independent Film Financing – Part One

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Independent-Film-FinancingWhat is one problem almost all independent film makers struggle with?

How to get the financing necessary to make their film.

Today I’m going to go over some of the different ways that films are financed.

This is Part One of a Two-Part Post to give you the most important information available on independent film financing. (you can find part 2 here)

If you are an independent filmmaker, producer or director then I truly believe that the information in this series of articles is going to help you take your film financing efforts to the next level.

We are going to talk about some of the most cutting edge way available today to get that all important financing.

Besides this detailed post I have also included a more condensed version of the information in a video at the bottom of this post.

So lets jump in!

Now unless you have a rich relative ready to give or loan you $5,000,000, (and if you do please introduce me immediately lol) you will need to become creative in how you raise the money for your film.

I joke but did you know that the most common way that a film project starts is using a personal loan from friends or family?

When you are starting out, your friends and family are probably your biggest cheerleaders so they are “warm” leads for money.

Usually these are smaller amounts that serve as seed money but this is a great way to get started! There are many ways that a film can be financed.

Most indie films use many methods to piece together most of the budget. Even if all of the funds cannot be raised to complete the film, a strategy is to complete as much of the film as possible and attract a distributor who agrees to fund the remaining budget, or enter into a co-production agreement with another company to complete the film and take it to market.

 

Crowdfunding Your Independent Film

The first method I’ll discuss is Crowdfunding because it is the current buzzword in the industry. This is basically where you reach out to a large number of small investors (a crowd) to secure some level of funding. Here is a donation crowdfunding infographic we did that gives you the big picture of how it works.

Its not easy raising your entire budget through crowdfunding, but, it is a great way to raise seed money.

You can raise the initial funds for things like the formation of your LLC or corporation, script options, producing a trailer, attaching talent, or creating a private placement memorandum (PPM), which will allow you to raise the big money for your budget.

This is called equity crowdfunding. The type of crowdfunding you see on popular sites like Kickstarter and IndieGoGo is called Donor Crowdfunding.

See Equity v. Donor Crowdfunding to learn the difference.

An effective strategy used in crowdfunding is to contract with a non-profit to act as your fiscal sponsor when raising money. This makes your project more attractive because many tax issues related to investing in a for profit project, which is likely your intent…to make money, can be avoided.

YES, Your investors can actually qualify for a tax deduction on their investment!

 

Film Sales Agent

A second fundraising method is using a Sales Agent to sell your project to foreign territories, or nowadays, digital rights. This is also known as pre-sales.  You may meet a sales agent at a film festival or film market that is interested in being the agent for your project before it is completed based on your script or presentation (i.e., trailer, storyboard). A sales agent will attempt to sell the exclusive right to distribute and exhibit your project to foreign territories.

In return, you will receive an advance called a minimum guarantee (usually 20% of the sale price). Reputation is key when choosing a sales agent. You want an agent that is known and respected by the specialty banks that lend on foreign rights.

The strategy is to take those foreign contracts and use them as collateral for larger loans that will contribute to your budget. The banks also take into consideration the credibility of the foreign territory, meaning, it looks at the track record to see if that country pays, so it is important to retain a sales agent that is knowledgeable.

Pre-sales will not usually give you the lion share of your budget, but it can be used as a promotional tool to attract money. For example, it may be attractive to a potential investor if they hear that you have pre-sold your film in Germany or the UK.

 

Tax Credits for Independent Films

Another high profile method is to secure soft money, or Tax Credits. They come in many forms but generally it is sponsored money that is free! Tax Credits (or Tax Rebates) are offered by states, cities, countries, and even nonprofits that are authorized to grant tax credits for projects based on cultural awareness or educate the public on important issues.

There are companies that loan against these tax credits which can help contribute toward your budget. Just like I mentioned about the banks vetting foreign territories, a lender is going to evaluate the tax credit to make sure the entity offering it has a good track record for paying.…for example, if a state that issues a tax credit is known for not paying in full or if there are hoops the lender will have to go through before it can get paid, then those tax credits are not as valuable.

I recently released a blog on tax credits if you are interested in more information on the topic. See my Tax Credit Blog for more information. Securing a traditional bank loan is a method of fundraising, but banks are not keen on lending money early in the process. They are more likely to lend money to finish a partially produced project.

A bank may also provide a bridge loan, or funding that you need in emergency situations, for example if you need to extend the lease on your shooting location to finish the film, however, these types of loans have high fees and interest rates.

 

Private Placement Memorandum for Film

Lastly, I will just mention equity financing, which is engaging in a formal fundraising campaign that uses a PPM to sell equity in the company that holds the rights to your project. Basically, you are giving up ownership in exchange for money. Doing this brings up potential issues, such as whether the equity investors have control over use of the money or other decisions related to the project.

I plan to do an article on how this process works and discusses the new general solicitation law that became effective in September 2013.

I hope you enjoyed part one of this article on how to raise money for your independent film. Please look out next week for Part 2 as we will cover some additional ways to raise money, and touch on strategies that will save you money, which can sometimes have the same effect to your budget.

If you would like to see a video on this information check out below!

See you next week.

Richard

 

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