Debt vs Equity: The 2 Main Sources of Film FinanceOct 01, 2022
Read time: 3 mins | YT Video
To finance feature films, you need Debt + Equity.
In the past 7 years I have financed and produced 8 feature films. All were financed through a combination of these two things. But it took me a while to work it out, leading to much wasted time and energy. Which is why I wanted to lay it out for you.
You will be able to finance ANY film you want if you understand these two sources of finance.
To be a Producer you need to be comfortable taking on debt.
The reason is that 50% of your finance is likely going to come from this source of finance:
~30% from a tax incentive
~20% from distribution advances.
But don't worry, I'm not talking about mortgaging your house. Let me explain.
When you secure a tax incentive the film commission doesn't pay you until you deliver your film. This leaves you with a cash-flow problem: you need the cash to make the film.
There are film finance companies who specialise in lending you that money. They charge interest and recoup the loan from the film commission. You can also borrow this money from a private individual or a bank. The benefit of working with a film finance company is they streamline the process.
This loan is not secured against any of your personal property or the assets of your company. It is secured against the film. The risk to you is low. The risk to the lender is also low because the government guarantees the incentive. Happy days.
The lender will undergo due diligence on the film and the filmmaker. This is to make sure they’re confident you have enough real cash and experience to complete the film. Your reputation is important here.
The same is true for a distribution advance. The sales agent won't pay you until you deliver the film to them. Another cash-flow problem. You get the idea.
A finance company will lend:
90% of the tax incentive @ 7-8% interest; 2-3% fees and legals.
80% of the sales advance @ 7-8% interest; 2-3% fees and legals.
This creates a safety margin for the lender in case you don't get as much back as you expected. And the loans sit in first position in your recoupment waterfall as ‘senior debt’. So the lender can recoup any shortfall in the loan from the gross receipts of the distribution of the film.
It also creates a 'Producer's Margin'. If you get the full amount of the tax incentive back, you can pocket the difference.
Before we wrap up this section, a quick note about GAP financing. It is debt finance secured against pre-sales. It is not equity finance to close a gap in your finance plan. Note the difference.
To be a successful Producer you need to know how to raise equity.
Equity is capital in exchange for ownership of any of shares / copyright / royalties. This varies depending on your country.
Equity investors are private individuals, often referred to as High Net Worth Individuals.
The biggest mistake you can make as a filmmaker is going to film finance companies to seek equity. It would be like going to a heart surgeon to ask for a nose job. You will waste countless hours, even days, doing this. Save yourself the pain.
Equity investors can also be key crew or vendors. On my films, the producers, director and post-production facility invest their fees.
Equity investors put up real cash that is at-risk. If the film doesn't perform they don't make money. They also can't seek repayment of that capital from you, the sales agent or a tax incentive.
A typical deal for an equity investor is:
120% premium in first position; and
A share of 50% of the net profit, apportioned based on their investment.
If you find an equity investor, look after them.
I know what you're thinking: all this money means someone wants control.
Not exactly. None of the financiers take creative control of the film. Debt and equity financiers have zero entitlement to creative input. A sales agent or distributor might have some input/consultation rights. But you have control of the project.
This is in contrast to TV, where there is one major financier: the network / streamer. This allows them to exert a large degree of creative control of the show. Film has many minority financiers, so as the Producers you hold the cards.
The optimal finance plan
Every film I finance today looks like this:
Debt - Tax incentive - 30%
Debt - Sales/distribution advances - 20%
Equity - Private investors, Key ATL Crew & Post Facility - 50%
The only time this changes is when the budget is too low to access a tax incentive. Or when we are accessing soft money through a grant, which usually only accounts for around 5% of the budget.
There is a bit to take in here, so if you have any questions feel free to reach out!
OK, that's it for today.
I hope you enjoyed it.
See you again next week.
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