in FACT OR FICTION

Financing Cycle For Film Production

Film production financing isn’t as simple as, “Here’s your money, go make shit.” If you want to make feature films or TV, you have to understand the film financing cycle.

Film production financing isn’t as simple as, “Here’s your money, go make shit.” Whether you’re financed by a studio/distributor or private equity, the financier will take steps to protect themselves. Those steps will make the producer’s job difficult and impact her ability to deliver a movie. So if you want to make film, you have to understand the film financing cycle.

Free download: The Different Types of Film Tax Incentives

Money Upfront

If your movie costs $5 million to make, you’ll actually need $5.5 to $6 million. Why the overage? Because you’ll have to post some bonds and make some deposits.

You’ll have to make deposits to the Screen Actors Guild or the Directors Guild of America if you want to hire anyone who is a part of those organizations. It’s possible to make a project without these people, but that’s uncommon. If someone is worth their salt, they are most likely a member of one of the guilds.

The DGA will require indie producers to put the directors entire fee in an escrow drawdown account. You’ll pay the director from this account, but it means you need to have all of his money before you shoot a single frame.

The DGA will also make you put money aside for below-the-line DGA members (Assistant Directors). You don’t have to deposit their entire pay (it’s about a quarter), but this won’t be a drawdown account. You still have to pay them from your pocket. You’ll get the deposit back after you finish shooting and everyone is paid.

Film production financing isn’t as simple as “Here’s your money, go make shit.” Click To Tweet

SAG will require deposits for actors, as well. They will want you to deposit 30 to 40% of the total actor spend. Again, this is a bond, not a drawdown account. So you’ll still have to pay those actors out of your pocket. The deposit will come back after you turn in a bunch of paper and mix the picture.

Vendors require upfront payments too. Some will require just a deposit. Others will ask you to pay the full invoice upfront.

Finally, payroll will require you to set aside double your highest week of labor spend. So if your biggest week costs $250K, payroll will want $500K in reserve. This is important to make sure everyone gets paid. If you can’t pay your bills or make payroll, people will jump ship immediately. And honestly, you can’t blame them.

Keep in mind that those deposits and bonds come back to you after you meet your financial obligations, but it means you need more money on hand then the movie actually costs. If you don’t have enough cash to cover those expenses in the beginning, you will have a cash shortfall and won’t be able to deliver.

So if you got $5 million to make a $5 million movie, you don’t actually have enough to finish your movie. But even if you get enough to make your content, you don’t get it all at once…

Paid in 5ths

Financing cycle

If you’re working with a studio, you don’t have to think much about financing. They hire the Line Producer and the UPM. They put your money in an operating account. You just have to focus on delivering the movie. This is a big reason many producers and directors prefer to work with a studio.

If you’re delivering a negative pickup, you might get a small amount of cash upfront (like $50K on a $5 million picture as a “skin in the game” payment), but you won’t get the rest until the end, so you’ll need to get cash some other way.

If you’re financed by a network, distributor or private equity investor, you’ll typically get paid in five chunks: 1) When you open a production office (small sum, usually 5-10%), 2) When you begin shooting, 3) When you end shooting, 4) When you deliver a rough cut, and 5) When you deliver the final cut. Sometimes there’s variation, but that’s the typical pattern.

From the investor’s perspective, the paid-in-fifths approach makes sense. They want to make sure you are spending their money responsibly. But as a filmmaker, this approach creates cash flow gaps that you’ll have to overcome. For feature films and TV films, those gaps could be 30-90 days. For negative pickups, the gaps could last up to a year.

Tax Incentives

As you probably know, some jurisdictions give tax rebates, credits, and grants to filmmakers if they make their films locally. The structure of these incentives differ across jurisdictions, but in most places, you receive a percentage of your labor spend back.

You can use these incentives to finance your film, but they take time to receive. Sometimes it takes as long as 36 months to collect, so tax incentives create more gaps in your cash flow.

How do you close this gap? With loans. If your distribution paper is good and you’re working in a known tax incentive environment, there are lenders who will lend you up to 85% of that incentive, but they’ll collect the entire incentive when it is released (to pay down the loan) and send you the difference. Of course, you’ll also have to pay $10K to an auditor so the bank trusts that they’ll get their money, at least $10K in bank setup fees and finally the interest on the loaned funds.

Competent Producers

You have to work with producers who understand that they won’t get all of their money up front. They need strategies to close their financing gaps. If that’s not part of the conversation, move on to someone who knows how to get shit financed.

Failing to understand the financing cycle doesn’t just cost you money. It can actually prevent your stuff from getting made.

I once worked with a YouTube video creator who was doing well on his own. He didn’t have a boss or financier. He had a solid audience that loved his stuff. But everything went to hell when he started working with a big studio because they didn’t really understand how to finance production.

At one point, he had to come up with $100K to close a timing gap. He had to pay out a participant before the distributor would give him the final payment he needed to finish the film. But he couldn’t pay that participants without the final payment. The distributor caved a bit and gave him $50K, but they would not budge on the remaining $50K. So he was in a weird place where he couldn’t deliver his movie without cash, but couldn’t get the cash until he delivered his movie.

Here’s the craziest part: He was the participant who needed to be paid. The distributor wanted him to pay himself before they would make the final production payment.

Eventually, we managed to get on the phone with someone at the distributor who listened to our problem. We said, “Listen, the only people who haven’t been paid are the creators. Everyone else has been paid. We can prove it. Let us deliver the movie now so we can settle up. Otherwise you’ll never get your content because these guys don’t have $50K.” Thankfully they relented, but that brings me to another important aspect of the film financing cycle.

Studio Machines

Financing cycle

Studios only know how to work one way. You can’t change their mind. You can’t negotiate the agreement. The agreement you get for your $5 million film is the same agreement Scorsese gets for his $200 million film (but the numbers and participation will be different). They have all the leverage here.

Why are they so rigid? Because they make thousands of minutes of content every year. The only way to stay efficient is to work the same way for every project. Each studio/distributor will have their own system, but they will apply that system to every project. The people who work there don’t want to deviate from that system. They resist change aggressively.  And you can’t blame them – they are working at scale and changing for your one movie, in the sea of thousands, is just not feasible.

That rigidity creates silos, as well. There are five departments in most studios/distributors who deal with your money and they don’t talk to each other. Most of the people in these departments don’t even know the filmmaker. They only know their role in the process.

  1. Development/Acquisitions
  2. Business Affairs
  3. Production & Finance
  4. Marketing
  5. Distribution

You may have some contacts in development because that’s who you worked with to greenlight the project. Business affairs puts your deal together, but you don’t speak to them because they don’t give a shit about your opinion and talk directly to your lawyer or representation. You get the deal they give you, then it gets turned over to production. After production, marketing and distribution take charge. It’s a daisy chain of responsibility, but they don’t really work together.

The studios have their way and they aren’t likely to change. They are bullies because they have all the leverage and they know it. Your only hope is to understand their system as best you can, accept your lack of control, and realize they aren’t on your side very often. They have their own goals that don’t necessarily align with yours.  In the odd circumstance that they do align, they are on your side – keep that is focus all the time.

Plan to use tax incentives to finance part of your film? Make sure you understand the seven different types of tax incentives.

Financing Help

You can be successful in film if you work with competent producers and realize you’ll have to come up with solutions for your cash flow gaps. Don’t trust the studio. Make sure you have someone in your corner to help you understand how and when you’ll get your money. Contact me if you need help.

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