To most independent filmmakers, the topic of film financing can seem intimidating at best. If you’re looking at it from the bottom up, the world of film finance can often seem very complex, a little scary, and downright incomprehensible: a business-casual lasagna, in which myths and superstitions layer right on top of hard facts and information.
But while understanding film finance can be a challenge, it’s not impossible and it’s undeniably important. In this post, we’ll ease you into the fundamentals of film finance by taking a look at one of the toughest questions in movie-making history: how do films get funded? Let’s start with the basics.
The bad news here is that a full understanding of film finance can’t be acquired by reading a few film financing books. However, if you’re trying to figure out how to get into film financing, the implied good news is that you can start just about anywhere visual media is made.
How are studio films financed?
Generally characterized by high budgets and higher financial expectations, studio films face an uphill battle in recouping their costs and turning an acceptable profit. For that reason, they’re often seen as high-risk investments and require an intricate film financing structure built from a variety of sources to mitigate that risk.
Pre-sales are one major contributor to studio film financing. Pre-sales movie funding is obtained when a studio or production company sells the rights to distribute a film in a particular region or distribution format before the film is finished. The worth of pre-sales is usually calculated based on the perceived value of a film’s marketable elements, which is why a script with Jeff Bridges attached will get funded a whole lot quicker than it would if the same role were filled instead by your cousin Jeff.
Gap financing is a similar but also fundamentally different part of film financing. Gap financing occurs when a loan is taken out based on a movie’s unsold rights, a value generally but not always limited to the rights to distribute the movie in foreign territories. There is no such thing as a certain thing in the entertainment industry, which makes gap financing a significantly larger gamble than film financing generated by pre-sales. However, because it’s secured by rights that are not yet sold, gap financing can also be highly profitable in the long run.
Slate financing is essentially what happens when hedge fund managers figure out how to get into film financing. It’s a form of private equity film financing in which firms will invest money into a studio for not one but several films (a slate of them, if you will). The idea is that a diversified slate of movies mitigates risk and renders the unpredictable entertainment market more attractive to both private investors and those that represent them.
A negative pickup deal is a contract in which a studio agrees to purchase the movie from a producer or production company for a specific sum after completion. In the meantime, the producer won’t see a penny from the studio and will have to take on fundraising all on their own. That may not sound like much of a deal at first, but the contract gives the producer a remarkable amount of leverage. With the negative pickup deal in hand, they can now go directly to a bank or other lender and procure a loan to round out their film financing structure.
Product placement to finance movies may not be your first choice, but it remains one of the most lucrative ways finance films. By at least the early 1990’s, product placement was ubiquitous enough to become a running gag amongst TV and film fans. But despite the clear comedic value of the practice, its financial value is no joke. If you’ve ever seen a James Bond film, you’ve seen 007’s questionable ethics play out right in the middle of what amounts to highly lucrative commercials for cars, clothing, booze, and tech. Yet the hundreds of millions of dollars the franchise has raked in from companies like Ford, Heineken, and Sony are but a drop in the multi-billion dollar bucket that is the annual market for product placement in film and television.
How are independent films financed?
Technically, independent films can utilize the same tools as studio films, and many do, but the reality is that the average indie simply lacks the leverage necessary to pull funding from high-rolling sources like super-gap financing or script-integrated American Express ads. Independent films often face a more personal battle for film financing than studio films, and it tends to play out over a longer timeline. Indie producers have to acquire their movie funding one step at a time, each piece leading to the next until the film can move into principal photography.
Film grants are essentially funds designated to subsidize an endeavor. Unlike most other forms of film financing, they are not direct investments and there is no expectation of financial return. When it comes to filmmaking, the majority of available grants are managed by governments. Their goal is to attract film productions to a given area in order to stimulate employment, the local economy, and, possibly, tourism based on promotion of the region or culture.
Film tax credits and incentives are also offered by many states and countries under similar restrictions. Depending on the region, a film production may be eligible for a sizable tax rebate on qualified expenditures, which can seriously slash the price tag of your movie’s budget. But in film financing terms, tax credits are referred to as “soft money” incentives.
Soft money forms of film financing generally offer no cash upfront. Instead, productions can only take advantage of them after the film is finished and all bills are paid, at which point the office responsible for managing the credit will issue a partial refund of taxes paid. Tax credits are a valuable part of an indie filmmaker’s film finance toolkit, but, obviously, they can prove difficult for independent films struggling to put together the funds just to get off the ground.
And that’s where private equity film financing comes in. Private equity film financing is the backbone of independent film financing. The exact opposite of a tax credit, private equity film financing usually entails either a single private investor or group of private investors who are willing to bet their cash on the moviemaking business upfront in hopes of reaping rewards down the line. Many truly independent production companies survive thanks to their access to such investors, financial loyalty being the reward for a solid production track record proven over time. For that reason alone, they’re a vital part of the indie ecosystem.
Private equity film financing on a small to medium scale can be one of the most straightforward film finance tools available, but it’s important not to forget that the entertainment industry is volatile by nature. Independent filmmaking, in particular, is a high-risk investment, and high levels of risk tend to be anathema to private investments over the long haul. The key- and a recurrent theme you may have noticed by now- is to mitigate risks and spread costs however possible.
Now well past its buzzword-y prime, the mere mention of “crowdfunding” is enough to send the eyeballs of many independent filmmakers careening backwards into their jaded skulls at broadband speeds. Nevertheless, it’s impossible to deny the impact crowdfunding has had on filmmaking and the wider entertainment industry as a whole. Film financing through the democratization of crowdfunding is perhaps the ultimate form of financial risk mitigation, and, if you can gain access to the right audience, it could be the most rewarding move you ever make as an independent filmmaker.
At the end of the day, how do films get funded? The short answer is, “Any way that they can.”