The Beginner's Guide to Production Financing
Ready to bring your script to life and get the cameras rolling on your next project? Start with a solid financing plan, mapping out the best funding options available to you. Whether you’ve been in the entertainment industry for decades, or you’re just starting out, this guide will help you on your way to financing your project like a pro.
Understand Your Financing Options
If you want to finance your film or television project you’ll first have to decide which option, or blend of options, will best fit your production. Key to this decision is understanding what’s available to you. A good place to start is with the four most common forms of financing:
1. Soft Money
In the film and television financing world, this generally means financing that does not need to be paid back, and includes incentives like refundable or transferable tax credits, rebates, and grants (from government authorities, nonprofits, or foundations). If you're new to incentives, visit our guide to production incentives.
When it comes to incentives, productions should always be aware of the requirements to claim a tax incentive in a specific jurisdiction. Are you considering a state that requires you to complete the project there, or in other words, are you considering a spend state vs. a completion state? In a “spend state” as long as you spend your money there, you can earn the credit whether or not you finish the project; other states will require you to complete the project there in order to be eligible for the credit.
If grants are the preferred route of financing, connect with organizations whose work aligns with the story of your script. If you’re creating intellectual property that completely falls within the mission and vision of a foundation doing work educating people in the same space, it’s worth the ask for funding. Nonprofits can even serve as fiscal reps for a project, handling the grant money and reporting, as long as the production is within the mission statement of the foundation.
This is financing from outside investors who contribute to a project in exchange for part ownership, and a cut on profits after sales. It’s a risky business investing in film, so be sure to bring on a lawyer to lay out all the terms and payment structure that will accompany the equity investment.
Transparency is key so investors need to know exactly what to expect and so you’re not held liable, especially if the film doesn’t make money in the end, which is the case more often than not with independent projects. Three questions to ask when planning out an equity investment: 1) How much of the project will the investor own? 2) How do you plan to pay them back? 3) What kind of potential profit might they make?
3. Traditional Loans (also known as Senior Debt or Gap Loan)
There are multiple different kinds of loans available for financing a project. You can get a loan against a tax credit, a loan from a bank or financing provider like Entertainment Partners, a loan against a minimum guarantee, or a loan against projected sales on territories.
An important consideration before approaching a bank or other lender for a loan is the completion bond.
Completion bonds (also referred to as Completion Guarantees) are a form of insurance purchased by the production to ensure the project will be completed on time and on budget. This protects the project from running out of money before completion which is especially important when working in jurisdictions like New York State, which requires the project be completed before they will issue the tax credit certificate. One of the first questions a lender will ask when reviewing a loan application for this funding option is, “Do you have a completion bond?”
It is always recommended that producers do their homework ahead of time to determine whether they need and qualify for a completion bond.
In the case of projected sales on territories, you’re looking to finance the anticipated value of a project on a worldwide basis and which will require sales estimates from a lender-approved sales agent, based on territory, in order to pursue a loan. Once the desired estimates are obtained, a bank or lender may say ‘yes’ or ‘no’, or require additional conditions, such as your sales agent selling the project in a few territories to vet if the estimates are accurate.
4. Mezzanine Loan
If there is a shortfall in traditional funding, Mezzanine Loans are also available to help finance a project. While these loans may seem attractive, they should be considered carefully and not as your first choice of funding options. Because Mezzanine lenders get paid back following the Senior Debt, and take a bigger risk, they often have higher interest rates.
Productions can secure Mezzanine Loans from private equity firms, hedge funds, private wealth desks, or other privately financed companies who are willing to contribute to a project for a high risk, high reward contribution.
After you’ve estimated your tax incentive money, how much equity you can raise, all loans that you might be eligible for, and however much you’re able to raise in crowdfunding, you may still have a short fall. Only then should you go out and look for a Mezzanine Loan.
Look at the Bigger Picture
As you weigh out your production’s financing options, it is important to remember that additional factors may play a large part in your decision making.
Consider what distribution rights you are giving away in exchange for cash
There is real currency in the distribution rights of a project, especially in the international market. In exchange for financing, productions need to weigh what kind of rights they are giving away, sometimes in perpetuity, and weigh all the collateral of a project before signing on with a distributor for financing. As a producer, you have to look at the cost of the project and say, ‘what am I giving away in exchange for this money? Is it enough? And what is this going to look like financially two years from now?
It may also be worth shopping around for a variety of distributors.
When you look at the value of a film, you have to look at it from the perspective of what is this film worth on a worldwide basis...not just in the US. If you are selling your movie to a North American distributor, who only wants North America, you still have the opportunity to sell the movie in Europe, Asia, Africa, etc. There is a real value in the international rights to your project.
Plan your cash flow needs
Anticipating the timing of cash needs is crucial during production to avoid jeopardizing tax credits. Incentive programs track productions closely on how they allocate the money to ensure it’s spent locally and that local vendors are paid on time.
A lot of producing and production accounting involves cash management. Not anticipating cash needs, or the timing of those cash needs, can be crippling.
Being able to look at cash flow and see if there is going to be a problem down the road is essential for a production to stay on track with their budget. Having a strong financial team, such as EP, to anticipate these cash flow needs can make all the difference.
Stay up-to-date on changing legislation and incentive programs
It’s important to be aware of how laws and incentive programs are changing since it could affect production budgets.
Changing legislation or incentive programs can significantly impact a production’s budget, so be aware of what’s happening in your filming jurisdiction. For help with this arduous task, look no further than EP’s Production Incentives site, which is consistently tracking proposed changes to legislation and providing regular updates with the latest information. You can also sign up for our monthly newsletter to stay informed about changes that may affect your financing opportunities.
To learn more about the Incentives Group at Entertainment Partners, and how we can support your production with loan opportunities or other financial questions, visit our Production Incentives page, or click the Contact Us button.