The global financial crisis (GFC) has affected many industries, and the film industry has certainly not been immune.
There are still institutions out there willing to invest in projects with the right ingredients, however, the number of high-net worth (HNW) individuals in the marketplace looking to invest has significantly diminished. HNW investors who used to dabble in the film business for the ‘novelty’ are now counting their pennies and are often reluctant to invest. That said, there are some new investors to the film business who fall outside of the typical private equity models.
Where money was allotted to films prior to the onset of the GFC, the downturn has had a limited impact. This is because these films were capitalised well before the crash.
There are a number of key players and financing techniques used in the film industry.
The producer – puts the project together. The producer assembles the team and arranges finance.
The director – orchestrates the film’s creativity.
Film sales agent – sells the film to international distributors.
Film financing is an aspect of film production that occurs before pre-production and is concerned with determining the potential value of a proposed film.
The first port of call for financing should be the Government. Governments will often give grants or other incentives to film producers for conducting film or TV production in their country. This is known as ‘soft money’ because although there will be obligations attached to the financing, it is unlikely that the full amount will have to be repaid.
For example, the Australian Screen Production Incentive is the Australian Government’s primary mechanism of supporting film and television production. It provides tax incentives for film, TV and other screen production in Australia and is available in three streams: the Producer Offset, to encourage the production of Australian film and TV projects; the Location Offset, a 15 percent rebate which supports the production of large-budget film and TV projects shot in Australia; and the PDV Offset, a 15 percent rebate which supports work on post, digital and visual effects production in Australia.
Pre-selling involves selling a film to distributors globally (each area is known as a ‘territory’), prior to the film being completed. Although they are committed to buy, distributors won’t usually part with their money until the film is finished. This means that the producer will probably have to borrow money from a bank in the meantime, using the sales contracts as collateral. This is known as discounting the pre-sales.
In situations where the producers and director are passionate about their project, they may defer the payment of part of their fees. That is, instead of receiving their fees from funds raised to finance the film, they may agree for these fees to be paid out of future income.
A producer may also receive equity funding. In return for providing equity cash, the investor will require a share of any profit the film makes. The rule of thumb is that for every percentage point of the budget provided in equity, the producer should sacrifice between 0.5 percent and 0.75 percent of their profit. For example, if an investor contributes 40 percent of the film’s budget, the producer may be expected to give the investor 25 percent of the film’s profit.
Banks may fund a film, however, as film financing is high-risk, they will often require considerable collateral in return for funding. If a bank can be convinced that a film will make a considerable amount of money, it may provide finance. A bank will also usually insist that their loan is repaid with interest, an additional fee is paid, the bank is a first-ranking secured creditor, and has the right to discount the pre-sales. In film financing, this type of funding is known as ‘bank gap’ financing and depends on the bank’s faith in the sales agent to sell the territories at sufficiently high prices.
The order in which financiers are paid is substantially a legal/financial issue, is usually decided prior to any finance being committed, and is known as the ‘recoupment waterfall’.
Independent legal advice should always be obtained prior to accepting finance from any source. Financing is a complex area, fraught with risk. This is why it pays to engage an agent/manager who has a law degree and is preferably accredited by a law society/bar association.
Producers should also always exercise scepticism when dealing with financiers, especially those that are not well-known. Ask companies for references and do some research before speaking to them. Also, get your agent/manager to do their due diligence on them.