Essential Guide: Film Financing

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.

Who finances a film?

In order to understand how movie funding happens, we need to first understand where movie funding comes from. It’s a simple question, but, as we’ve established, the film finance industry defies simple answers.

The myth around film financing goes something like this:

“Once upon a time, a director walked into a production company and pitched a movie. Everyone loved it. The producer snapped her fingers and- boom- the director’s project had a fully-funded budget. The end. Where should we hold the wrap party?”

While that does sound great, in reality, there are a few more steps involved.

That’s because the money that powers film financing flows from a combination of many unique, individual sources that are often unconnected in any way except their purpose. In the realistic version of the myth above, the production company is not so much responsible for providing funding as it is for finding funding sources and stitching enough of them together to grant the director’s project a much-coveted greenlight.

So exactly who finances a film? The short answer: anyone.

Technically, movie funding can and does come from anyone (or anything) that has access to both high volumes of cash and an interest in investing it. I’m talking about banks, private investors, film distributors, major corporations, governments, and possibly your grandmother’s pension fund.

The point is that film financing almost never flows from a single source. Getting an individual film funded at a professional level usually requires an intricate balancing act between multiple investments, debts, and deals. Understanding that balance is the key to a basic knowledge of film financing.

Now, I know what you’re probably thinking:

What are film financing companies?

Yes, film financing companies do exist, and they are big fish in the Hollywood pond. However, they probably operate differently than you would expect. What you might recognize as a film finance company in deed is not necessarily called a film finance company in word.

Entertainment companies like FilmNation, 30WEST, A24, and Annapurna Pictures don’t explicitly label themselves “film financing companies,” but their mastery of film finance is undeniably a massive element of their success. They are, in that sense, film financing companies.

The trouble is that, in another sense, they’re also not really film financing companies.

What we refer to as “film finance” is not a single field of industry. It’s more like a Frankenstein’s monster of deals, debts, and financial activities that ultimately lead to the kind of funding that enables movies to be conceived, created, and zapped into eyeballs everywhere.

Film financing companies, by contrast, are more like Doctor Frankenstein himself. Their expertise is in bringing the monster to life through the right combination of body parts and electricity.

The reason that film finance companies don’t call themselves “film finance companies” is because the term doesn’t accurately describe the details of what they do. A24 and Annapurna Pictures are more identifiable as production companies that bet big on a diversified slate of high-quality indie films. FilmNation started as a foreign sales firm and has a reputation for its approach to distribution. And 30 WEST is a media firm that maintains an intricate web of development and financing practices that extend well beyond the world of traditional filmmaking.

Even agencies get in on the film financing game these days via talent packages and their own equity.

And to be frank, that’s just scratching the surface. Film financing companies can draw their funding from a potentially massive range of sources.

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.

To illustrate, let’s examine the broad strokes of film financing behind a few commonly encountered (but very different) production categories.

Let’s start with something straightforward.

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.

Let’s take a quick look at a few of those sources to illustrate just how layered that film financing structure can be:

Pre-sales

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. (Unless, of course, your cousin Jeff is actually Jeff Goldblum, Jeff Daniels, or Jeffrey Wright.)

Gap financing

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

In the modern studio film market, the practice of slate financing has become increasingly prevalent.

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.

Negative pickup deals

While we may understandably assume that film financing relies solely on funds coming into the studio, one of the most prolific forms of studio film finance actually relies on funds going out. 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.

… And many more

Studio film financing is a huge, complex set of practices that we could spend days dissecting and still not understand completely, but these are the basics. Thanks to their size, studios maintain access to forms of film financing that are large, powerful, and occasionally even a little eccentric.

Like product placement

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.

But enough about the titans of the industry. Let’s dig into how the underdogs make it to day 1.

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.

Unsurprisingly, each motion picture’s road toward the green light is different, but many of them share the same starting point:

Grants

What source of film financing could be better than one that comes with no threat to the production’s bottom line?

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.

In the U.S., government grants for filmmaking are less prevalent than in other parts of the world, but certain states - like Georgia, Louisiana, and New Mexico - do offer subsidies to those willing to shoot within their borders.

Tax credits & incentives

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.

Private equity film financing

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.

Your own pocket

Using your own money to finance your movie is usually the ultimate "no-no." And for obvious reasons. But if you're a young Mark Duplass, you might have learned a different lesson.

In some instances, taking this risk actually pays off.

Crowdfunding

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.

But whether or not you can access the right audience segues naturally into a separate question entirely:

Why are films funded?

This post began with the question, “How do films get funded?” But, as usual, the more important question is why.

Why do some films get funded and others don’t?

There are several potential answers to that question, and many of them are valid, but there’s only one fundamental truth at the question’s core. Films are funded because people believe in them.

And I know. That does sound, to borrow words from Chester Cheetah, “dangerously cheesy,” but it’s also true.

If you want to get a film funded, you have to find ways to get other people to believe in it. Fortunately, it’s a challenge that can be met in a lot of ways.

You can master your in-person pitch, craft a sizzle reel, design film look-book examples, or combine all three. From a purely financial perspective, you can build a tight budget and map a film distribution plan to tempt even the most skeptical investors.

And, oh yeah, having a great idea for a project doesn’t hurt either.

Whatever methods you choose, the point is to present film financiers with something they want to finance, something they want to be involved in, whether for cash or just for kicks. If you can sincerely do that, your battle for film financing is already half won.

How are commercials funded?

Funding for commercial productions is completely different from what you’ll experience on a feature film, but it does demonstrate at least one concept that’s relevant throughout the entire film financing spectrum.

The process begins when a commercial production company submits a bid to a client through their advertising agency. This usually includes a budget constructed in response to a creative brief and a director’s subsequent pitch on that brief. The agency and client then review the pitches and bids, awarding one that they feel best meets their needs. Finally, the production company behind the awarded bid receives funds in accordance with their submitted budget and makes the commercial.

If the commercial is brought in under the original budget, that usually leads to higher profit for the production company. Vice versa, if a shoot incurs budget overages, that can have an equally negative impact of the production company’s bottom line.

The procedures underlying the film finance of commercials are simplistic compared to what generally occurs in television or feature filmmaking, but the role it grants to the production budget exemplifies something critical for all filmmakers.

Notice that the production budget is both a selling point to acquire financing and a major factor in determining ultimate profitability. In other words, creative but responsible budgeting can be a force multiplier for both financial risk and financial reward.

And no matter how complicated film financing gets, that simple principle always remains true. Even for blockbusters.

Wrapping up

At the end of the day, how do films get funded?

The short answer is, “Any way that they can.”

Next time you’re thinking about film financing, reach out to a Wrapbook specialist to chat through any questions you might have about the potential insurance and film payroll hurdles you'll have to clear.