I once worked with a couple of animators who got in bed with a big studio. (I don’t want to say their names or the studio’s name, but you would recognize them all.) They delivered their content and asked for the final payment from the studio. But the studio refused.

According to the agreement, the studio couldn’t release the final payment until all the deliverable were approved. But the animators couldn’t deliver all the elements until the studio made the last payment (they needed cash they didn’t have).

The animators couldn’t pay their vendor, so they could deliver, until they had the money. But they couldn’t get the money until they paid their vendor and delivered. They didn’t have any cash to lend, nor did they have collateral for a bridge loan. The studio wouldn’t budge from their usual policy.  You’ve heard that infuriating phrase “sorry sir, it’s policy.”

Ultimately we got the studio to accept delivery from a temp, which was not the final version that bound for distribution (it had a watermark and time code burned in the lower third of the frame). It was a fucking sham devised by the creative executive so finance would get over their inane “policy.”  The fix our creative executive devised was to get post production to say the project was delivered without looking at or QCing the film (for a day or two) so that post could tell finance that the project was delivered.  You see, post would get the final in 24-48 hours so they could do their work on the final picture.  It was the most ridiculous solution to the strangest financing gap I’d ever seen.

Most financing gaps aren’t so face-palming-ly frustrating as that one, but every production deals with them. It’s part of the producer’s job to anticipate them, prepare for them, and solve them.

Free Download: How to Prepare for Your Film’s Cash Flow Gap

What Causes Financing Gaps?

Financing gaps

As a filmmaker, you’ll have gaps in your financing because financiers don’t fund the production all upfront. They dole out cash in installments.

This system creates one or more financing gaps. There is always a gap towards the end between when you need to spend money on post production and when you receive the final payment. This gap could be as little as 60 days and as long as six months. Depending on how the production company spends money, there could be other gaps.

It’s part of the filmmaker’s job to anticipate financing gaps, prepare for them, and solve them. Click To Tweet

If you’re making content for a network or an OTT platform, they’ll generally give you 50-70% of what you need to make it. You’ll have to raise the rest from foreign distribution or some other mechanism.

If you’re a producer working directly for a studio, you don’t have to worry about financing too much. The studio will handle that. Your fee is a line in the budget and you’ll get paid in four or five installments throughout the process. You’re just a technician, basically.

If you’re a private production company that’s funded by a studio, they will pay in quarters.

  • 25% when you open prep
  • 25% on the first day of principal
  • 25% at the end of principal
  • 25% when you deliver the final content

In some cases, studios pay in fifths.

  • 20% when you open prep
  • 20% on the first day of principal
  • 20% at the end of principal
  • 20% when you deliver a rough cut
  • 20% when you deliver the final content

In both cases, that final payment is usually broken into two pieces: A final payment and a small holdback. The holdback is a small bit kept until the end to incentivize you to submit final paperwork. Delivering a film requires handing over boxes of paperwork. The studio doesn’t want you to run off without finishing that up.

In a private equity deal, the investor contributes cash to an LLC. The LLC wants to have the entire investment before shooting starts, but the production company receives it in stages just like it would from a studio.

The shitty part about these studio/network/OTT arrangements is that there’s nothing you can do to change them. Financiers fund tens of thousands of minutes of content every year for their libraries. Internally, the development department closes a deal and the production finance department sets up payments that match with your production schedule. They can’t create unique funding agreements with every filmmaker. They would do nothing else.

A quick note for investors…

NEVER contribute the entire cash contribution up front. You want to hold it back as long as possible so you maintain leverage, otherwise you’re at the mercy of the filmmakers.

If you give the filmmaker all their money upfront, they no longer have an incentive to keep you happy. They could change big variables, like the actors, the financing, tax incentives or the distribution strategy. Technically, these kinds of changes would be fraud and you could take him to civil court, but it’s better to protect yourself in the beginning rather than rely on legal remedies.

The filmmaker has to keep you happy as long as you control the money. He’s inclined to work for you because there’s a financial incentive to do so. And if he fucks up, steals, or starts making changes that don’t suit your investment, you can always walk away with the remainder of your money.

Remember: Producers have a shifting moral compass. It will shift in whichever way helps them meet their goals (whether that’s money in their pocket, awards, or a way to get their next big movie deal). Try to incentivize filmmakers to make decisions in the best interest of your investment. Investors should always behave like the studios would.

How to Close Financing Gaps

Financing gaps

Okay, so now that you know you will deal with at least one financing gap, you probably want to know what to do about it. There’s no secret here: You need to borrow money.

There are plenty of sources that will provide you with bridge loans to get through your gaps as long as you can show them distribution paperwork. If they know you will get paid eventually, they are happy to fund you for a short period of time in exchange for interest.

However, the bank will still want collateral in case the distribution deal never pays out. They want you (the filmmaker) to put up something tangible, like real estate. Sometimes they’ll take securities. The more collateral you put up, the lower your cost of financing and the higher the lending ratio against your distribution agreements or estimates.

Basically, the bank will set you up with a line of credit. We look for financiers who specialize in lending against distribution agreements. You’ll have to answer many questions, fill out a ton of forms, provide financing documents, cash flow statements, use of funds, etc, etc, etc.  Once approved, they’ll transfer funds on a weekly basis as you request funding off your cash flow schedule.  One note here: Chase, Wells, BOA, [insert big bank name here] (assuming they still exist after 2020) are ALL fucking clueless about entertainment lending.  Don’t waste your time with them for lending against distribution paper.

When it comes time to repay the bank, there’s not much for you to do. The bank will take first position on your distribution agreement. This means the distributor will pay the bank first, rather than you. The bank will recoup its loan, interest, and any fees, then return the excess to you. They do this so you don’t decide to run off with their money.

You’re probably thinking, “Why doesn’t the financier provide better cash flow? If the filmmaker received cash more often – say every month – wouldn’t that make a bridge loan unnecessary? The interest they would have paid could be spent on the content or used to reduce the budget.”

While it’s true that money is “lost” to the bank, that is the cost of doing business. For one, it doesn’t typically add up to more than 3% of the budget. For another, producers often borrow money to fund projects, for which they have to put up collateral. By forcing the producer to take out a bridge loan, they push some of the risk on to the filmmaker.

The big financing gaps aren’t the only ones that can affect your production. Getting paid is a chore in and of itself. Money never seems to come in on time, no matter how confident your financier assures you it’s on the way. Studios and networks are the worst. If you’re supposed to receive cash on May 1st, you better have enough money to keep things rolling for a week or two, because there’s no guarantee you’ll have your money when you need it.

Unexpected cash flow gaps can destroy your film. Download this guide to learn how to prepare for those gaps.

Get Yourself an Ally

If you weren’t prepared to close your cash flow gaps, your film is doomed. There’s no easier way to say it. If you’re a filmmaker, you need to prepare ahead of time to close those gaps. If you’re an investor, you need to be sure the filmmaker is aware of gaps, otherwise whatever you spent so far will be wasted.

If you find cash flow gaps confusing I think you might not be prepared enough to make a film without an expert. I strongly recommend hiring an ally to plan your budget, production schedule and accounting. Let me know if you need help.

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