Types of Indie Film Financing

(and the Pros and Cons of Each)

“Show me the money.” Independent filmmakers will likely need to say this multiple times and in multiple ways to multiple people while trying to get their movie off the ground. But not all money is the same. How much you need (or can get), how it must be paid back (if at all), when it’s paid back and what terms come attached are just a few of the many differentiators between the various types of film financing. And while it’s unlikely you’ll use all of them on a single project, it behooves you to know a bit about each one so you can pursue whichever ones make the most sense to achieve a greenlight.

HARD MONEY

This is funding that requires repayment or involves issuing returns to the funder. We will look at four types: equity, debt, gap and supergap.

Equity

This is straight cash in exchange for an ownership stake or a share of the profits. It’s probably the type that filmmakers are most familiar with. If rich Uncle Frank writes you a check, that’s equity. If you crowdsource small donations from 100 different sources, that’s equity. If a company finances your film through their angel fund, that’s equity. This money can be used for development, production and/or marketing and only gets paid back if the film is successful, with returns tied to box office, streaming and various other revenue streams. Typically, investors will recoup 100% of their initial investment plus a 20% premium first, and then split all revenues thereafter with the filmmaker. If the film doesn’t make any money, the financier loses their investment.

Pros: Lots of equity sources are available both inside and outside the entertainment industry. And the money doesn’t need to be paid back like a loan would be.

Cons: It’s very high risk. Equity investors are often the last to be paid back and their money isn’t secured against any collateral, which makes it challenging to get buy-in.

Debt

These are loans taken out against collateral, making them far less risky than equity. You might get a commitment from a studio or domestic distributor that you can bank, whether a negative pickup deal (buyer agrees to pay the entire negative cost of the film upon delivery) or a minimum guarantee (buyer agrees to pay a specified advance against future earnings). You might pre-sell distribution rights in foreign territories, which usually involves getting a small advance from the buyers, with the balance being banked using the contract as collateral. You can also get a loan against soft monies like tax credits that may not be paid until after the film is completed. And short-term bridge loans are handy when you need immediate financing to cashflow gaps — for instance, paying deposits for name actors before larger sources of funding come in. The key differentiator is that debt needs to be paid back with interest according to a specific schedule whether the movie makes money or not.

Pros: Qualified lenders are plentiful if you have the right collateral, as it gets paid back before equity. You also get to retain full ownership and control, as lenders don’t take a stake the way equity investors do.

Cons: This money needs to be paid back whether your movie makes a return or not, and interest on the loan needs to be factored, cutting in to the amount that actually goes toward your film.

Gap

This helps you close that final budget chasm — the “gap” — to get you to a greenlight. Gap is a type of mezzanine financing that comes in at the end of your capital raise when you’ve already secured most of the budget through other means. Common practice is for gap to cover up to 20% once at least 80% is in place. It’s riskier than debt because repayment depends on unsold international distribution rights, which entails speculative revenue projections, rather than on tangible collateral like sales contracts or tax credit award letters. But it’s less risky than equity, which is secured by absolutely nothing, and it gets paid back before equity does. Because of the risk, gap financiers often require a high premium.

Pros: This can be the final crucial step to a greenlight and is not required to be paid back like a loan.

Cons: The high risk level makes gap expensive (it could be 15% or more plus fees) and will require strong foreign sales projections from a reputable agent.

Supergap

Some financiers will offer an additional level of mezzanine financing if the gap required to get to a greenlight is more than 20%. This is most commonly utilized when a bank won’t issue anymore gap. Assume, for instance, you have: 1) raised at least 70% of your budget through non-gap sources; 2) have a gap financier covering 20%; and 3) can demonstrate through a sales agent foreign projections that cover that last 10%. A supergap financier might come in to plug the final 10% hole. Supergap is even more risky than gap though because it is repaid after gap when unsold territories may have dried up. As such, this type of financing is often used as a last resort.

Pros: Such funds help you get to a greenlight when traditional gap isn’t enough and, like gap, does not have mandatory repayment terms.

Cons: Only a small handful of specialized financiers offer this because it’s beyond the risk tolerance of most banks. The risk level also means significant upfront rates and fees — even more than traditional gap.

SOFT MONEY

This is money that does not need to be paid back at all. It does not require taking on debt or giving up ownership. We will look at four types: tax incentives, brand integration, grants and in-kind contributions.

Tax Incentives

Many filmmakers have become familiar with these over the years, as nearly every US state and many foreign countries offer some form of them. They are government-run programs that offer money back to a film production based on a percentage of qualified expenditures made in their territory (whatever costs that government deems applicable to their program). For example, if a state offers a 30% incentive on $1 million worth of qualified expenditures, you get $300,000 from that state upon completion of the production and satisfaction of all program requirements. Incentives are usually issued in one of three ways: 1) A transferable credit you can sell at a discount to others who have a tax liability; 2) A refundable credit that covers your tax liability with the difference being issued as a cash refund; or 3) a straight cash rebate. Since tax credit monies don’t typically materialize until months after a film is complete, some filmmakers get a loan against the tax credit award letter at the beginning of their project so the funds can be used for production while others use the money for marketing expenses or to start repaying investors.

Pros: It can add up to be a significant percentage of the budget. If it’s not needed for production or marketing costs, it affords you the means to start paying back investors early, even before the film is released.

Cons: Some tax incentive applications can be complex, and applying doesn’t mean you’ll get approved, especially in states with lotteries. Getting approved also doesn’t mean your final payout will be as much as you estimated. And long wait times for the money can mean taking on debt to use it for production.

Brand Integration

Companies will often pay to have their products or logos featured prominently in a film. They may also provide product that offsets the budget. The early practice of product placement (a brand is simply visible in the scene) has given way in recent years to the more common practice of product integration (a brand is actively used by one or more characters in the scene). Companies that represent various brands will go through your script, often at no upfront cost, and identify potential opportunities for integration. How much you can get depends on a whole host of factors, including the budget size, genre, story, attached cast, how the product will be used and how prominent that usage will be. And like tax incentives, that money doesn’t usually come in until the film is done, as the brand wants to ensure their product appears in the final film according to all terms specified in the contract (i.e., actor A was drinking their soda on screen during at least two scenes for a total of five minutes of run time). Therefore, you may have to take on debt if you want to use brand integration monies for production.

Pros: It doesn’t need to be paid back and helps offset the budget through both cash and product. Association with larger brands also adds credibility to the film.

Cons: Integration requirements can be very specific and may interfere with creative choices. Like tax credits, you also don’t get the cash until the film is completed.

Grants

Both private and government entities around the world offer arts grants to films of all stripes. Some may cover only a specific phase of the filmmaking process, whether it be development, production, post or marketing, while others may apply to the whole project. Most grant programs, however, are very specific about what they want, and the application process can be rigorous, requiring detailed proposals showing alignment with the funder’s mission. Projects that address a cause, serve a community need or otherwise have some beneficial social impact are the most likely to get approved.

Pros: They help close budget gaps, don’t require repayment and boost credibility when coming from a respected organization.

Cons: Competition is stiff and ways to use the money can be narrow. Acceptance can also entail sacrificing certain creative choices.

In-Kind

These are non-cash donations of goods or services that reduce the overall budget. This might include a property owner who lets you use her home for free, a vendor that doesn’t charge you for camera equipment, a lawyer who offers pro bono legal services, or a restaurant-owning friend who donates all the catering. (Note: some grants may provide in-kind products and services instead of cash.) In exchange for the donation, the donor sometimes asks for an equity participation equaled to the value of the thing donated. For instance, if you budgeted $10,000 for grip gear on your $1 million film, but the grip vendor doesn’t charge you for the rental, they may instead want a 1% stake in the film.

Pros: Such contributions add immediate, tangible value to the production while offsetting the budget.

Cons: They are not as flexible as cash and may still require giving up equity, which your cash investors would have to be on board with.

Having a fuller picture now of the major types of film funding available will hopefully allow you to structure an achievable financing plan that best fits your project needs, timeline and resource base. Next comes the hard part: getting people to “show you the money.”