Guide to Film Financing: Loans Explained
If you are a filmmaker trying to secure a loan or an investment to your project, this blog will help you understand the considerations an investor would be thinking through.
Understanding Film Financing Basics
What Are Film and TV Production Loans?
Why Loans Are a Key Financing Tool In the Film and TV Industry
Film production loans represent an attractive investment option for investors in that they act as lenders to the production at hand. These loans can be either secured or unsecured (think of security like a mortgage over the film). Typically speaking, the value of the loan is tied to the “asset” the filmmaker is offering. This can be tax credits receipts from almost any country or distribution fees. The fact that the loans are tied to an amount of money (i.e. the tax credit receipts or the distribution fees) that the producer is fairly certain to receive, makes these types of loan comparatively risk-removed.
As we’ll see below, there are other types of loans such as bridge and gap loans - however, they are a lot less frequent than production loans that are ‘secured against’ tax credit receipts and/or distribution fees.
Loan vs. Equity Financing in Entertainment
Equity investments are higher risk than production loans because they are not ‘tied’ to a relatively certain return, such as tax credits or distribution fees. Typically speaking, these investments are recoupable (i.e. repayable) from gross receipts. Therefore, if the film flops and doesn’t generate enough gross receipts to repay the investor, then there is nothing the investor can do about it. In return for the much higher risk, the investor in this case tends to ask for a much higher premium than the financing fees that would be due to a lender providing a production loan.
Investors tend to spread their risk across several films and therefore the amounts provided tend to be lower than the amounts a producer could borrow from a lender. For the producer, procuring an equity investment can constitute a much needed cash injection when there is a gap in the budget that can not be covered by a loan.
Common Types of Loans for Film and TV Projects
Tax Credit Loans
If the film or tv project will generate tax credits and if those are offered as ‘collateral’ to the lender, then we would talk about a “tax credit loan”. By way of example, if the tax credit auditor of the film estimates that that film is going to generate £100k of tax credit receipts, the value of the loan would amount to up to £100k less the financing fees. The advantage for the producer is that the cash from the loan would be available at the start of production, whereas the tax credit receipts would be payable at the very end of the production. Even if the lender is based in the UK, they tend to be willing to lend against the tax credit receipts of another region.
Pre-sales loans
The same principle applies to loans that ‘cashflow’ the value of licence or distribution agreements - the lender would look at the amount offered in the agreement and agree to lend an amount up to the value of the distribution fee, less financing fees. The lender will want to see the licence or distribution agreement having been signed and, in most cases, the lender will want to see evidence that at least the first tranche of the licence or distribution agreement has been paid.
Collateral on tax credit loans and pre-sales loans
We speak colloquially about ‘what collateral is being offered’. This refers to the above - i.e. tax credit receipts and/or distribution fees - as well as how those will be directed to the lender to repay the loan. In other words: if all goes well, the lender gets repaid ‘from the collateral’ and the producer won’t need to personally repay the lender.
In the case of a tax credit loan the relevant tax authority would pay the tax receipts to the lender’s account and, unless there is default interest, that would constitute full repayment of the loan. Similarly, if there is a loan to cashflow distribution fees, the lender and the broadcaster or distributor would typically enter into a direction to pay or notice of assignment in order to paper the flow of monies from the broadcaster or distributor to the lender’s account.
To the lender, that has the huge advantage of knowing that the tax credit receipts or distribution fees won’t go through production’s account, but directly to the lender’s account. To the producer, that has the advantage of not having to worry about repaying the loan once it’s been concluded. Of course, if delivery is delayed or if the tax authority is slow in paying the tax credit receipts, then default interest would start accruing which the producer often agrees to pay out of gross receipts - however, if that’s the feasible, then the producer needs to repay the default interest out of their own funds.
Of course, the lender will need to do some more due diligence - for example the creditworthiness of the borrower (i.e. production company) and, if applicable, the broadcaster or distributor, the track record of the individual producer (i.e. have they delivered films on budget and on time before), the underlying rights (“chain of title”) of the project, etc.
Gap financing
Gap financing refers to a type of loan in which the lender cashflows a number of already contracted presales. In addition, the lender will agree to cashflow a certain amount based on the sales agent’s estimated future sales. Therefore, the lender takes on an amount of risk. There will be some degree of negotiation about what happens if gap sales aren’t concluded to the value that had been estimated and the specifics will depend on the particular deal at hand. These types of loans are currently relatively rare in the UK.
Bridge financing
Bridge loans are loans that lenders are willing to provide on short notice to production prior to the start of principal photography. Typically, most of the ‘main’ loans (i.e. the tax credit loan and/or the presale loans) will be provided around the first day of principal photography. However, production is likely to have spending needs before then - after all, pre-production tends to cost quite a bit of money, too. In the event that production doesn’t have access to equity investments (see above), which are sometimes available prior to principal photography, the only other avenue for production would be to secure a bridge loan.
Bridge loans carry a much higher risk than ‘usual’ production loans. This is because the lender runs the risk of lending to a production that might, at that stage, still collapse. Because bridge loans tend to be provided at a much shorter notice, the lender typically doesn’t have as much time for due diligence and contract review. Because of these factors bridge lending tends to be a lot more expensive. The producer will need to factor in repayment of the bridge loan - and associated financing fees - into the production budget as the bridge lender tends to be repaid from the film’s ‘main’ loans and investments.
FAQ
Can you get a loan to make a movie as a first-time filmmaker?
Yes, absolutely. If you are looking for a tax credit loan, then the key would be to secure a tax credit opinion from a reputable tax credit auditor. I have worked with several tax credit auditors in the UK - please get in touch if you would like a (non-affiliated) recommendation.
What banks give loans for film projects?
There are a number of banks and private financing companies that provide loans in the UK. Most of them concentrate on tax credit loans and presale loans. As mentioned above, gap loans are pretty hard to come by these days. I have worked with some of the UK’s biggest film financing companies and am happy to talk you through the options - please get in touch if you would like a (non-affiliated) recommendation.
What are the best places to apply for film production grants?
Grants might be an option, too. Depending on which country you are from and depending on where you are shooting your film, you might be able to apply for various grants.. In the UK, the main public bodies are the BFI, Ffilm Cymru Wales, Screen Scotland, Creative UK and Northern Irish Screen. For documentaries in the UK, try the BFI Doc Society.
How can I get a film production loan?
In short: for a tax credit loan you’ll need a robust tax credit opinion from a credible tax credit auditor of the country you are going to be spending your production budget in. For a pre-sales loan you’ll need a fully executed distribution licence agreement and potentially proof that the first payment(s) have been received from the distributor. Lenders will also look at your budget, chain of title, cashflow schedule, finance plan, insurance, and your main cast and crew agreements. I have written more about the key film and tv contracts here. Please get in touch if you would like more advice on how to approach financiers.
Would you like to know more about film financing? Or do you need advice on a potential film financing deal?
I have more than 10 years of experience in structuring the legals of film financing - for a free consultation please do get in touch with me.