Legal QuestionsDevelopment: 6 Ways to Finance Your Film
July 15, 2016
The script is ready and it is time to move into production. Not so fast. Even micro budget indie films take a little bit of cash. There are a variety of ways to finance your film, a few of which are outlined below. Each with its own benefits and drawbacks. Deciding which one is best for you is highly dependent on the project, but it’s always good to know your options.
Debt Financing. In layman’s terms, the good old-fashioned loan. Traditionally, the lender is a bank, but it can be anyone willing to extend you money on credit, even mom and dad. Remember a loan is not a gift. It must be paid back upon certain terms as specified in a promissory note or other lender agreement. Pros: A loan affords no ownership interest in the company or project to the lender, although some form of collateral will likely be required. Cons: Without sufficient collateral – like a presale agreement – a traditional bank loan is probably off the table for the average indie filmmaker. If you are successful in scoring a loan, make sure you budget for the debt service.
Private Equity. An equity investor invests in the film through a corporation or limited liability company. The investor becomes an “owner” and is entitled to receive a percentage of the company’s profits. There is no obligation to pay back an investment like there is with a loan (which increases investor risk), but there is certainly an expectation from the investor that he or she will receive their investment back along with a reasonable rate of return (anywhere in the 10-25% range). Once the investor has been made whole (plus the premium rate of return), the production company and investor typically split remaining net profits 50/50. Pros: Investment funds don’t need to be repaid and with the new regulations under the Jobs Act reaching investors is easier than ever. Cons: Before soliciting investors, you must consult with a lawyer and most lawyers don’t work for free.
Pre-sales. Not as common as they once were, though indie filmmakers with a proven track record may still find the pre-sell door open. This financing vehicle allows a production company to sell off some or all its distribution rights before the film is made. The producer then uses these pre-sale contracts as collateral for a more traditional bank loan, otherwise known as “banking the paper.” Pros: Reduces the risk of loss as you’ve guaranteed distribution. Cons: A completion bond will be required (fee is around 2% of the production budget).
State Tax Incentives. State tax incentives, discounts and rebates are a form of soft-money available in many states and countries around the globe. If your production satisfies the criteria, including minimum spends and the use of local labor force, then incentives are an attractive resource. Some states (like Louisiana and Georgia) allow you to transfer the credits and exchanges have sprung up allowing filmmakers to pre-sell the credits to secure much needed production funds. Even in those states that don’t allow the credits to be transferred, the credits can be used as collateral to obtain an advance on production funds. Pros: Incentives can be sold for a discount and used for production or can act as a guaranteed return for investors. Cons: Each states’ rules are different so do your homework.
Grants. Grants fall under the “donation” model of fundraising and are a common resource for documentaries or other special interest projects. Be prepared to do your homework and get that pen ready for the ensuing paperwork. Pros: Grants do not need to be repaid. Cons: Not available to all types of projects or filmmakers.
Crowdfunding. And last but not least, crowdfunding! There is nothing I can say that Seed&Spark hasn’t already covered on its website. Check it out. Look around. All the resources you need to run a successful campaign are there. Pros: Build an audience for your film (and yourself) while raising money. Cons: It takes a lot of hard work to run a successful campaign. (But Seed&Spark will help you every step of the way).
Use one or use them all. Get creative with the combinations. But get out there, and bring your film to life.
Stacey will be a guest on Seed&Spark’s Twitter Chat on July 19, 2016 at 11:00PST. RSVP here for prizes.
© 2016. The Law Firm of Stacey A. Davis, LLC. All rights reserved.