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Independent film finance - a beginner's guide

There are various ways for people to invest in independent film, ranging from direct investment into single film productions to investments into companies that are more broadly connected with financing the production of multiple films.

But for the uninitiated, the world of independent film finance can seem complicated. This is because independent producers often raise money from various different sources, and the composition of a film’s financing can be structured in many different ways.

Below, we have set out some of the main sources of funding that independent filmmakers use to fund the production of their projects.

Soft money

In the UK, producers can raise finance from organisations like the British Film Institute and the BBC. This is sometimes referred to as ‘soft money’, because the organisations are not necessarily expecting a significant financial return.

Soft money is often used to finance the development phase of making a film, when scripts are being drafted, key cast and crew recruited, and so on. This is the riskiest time to put money into a film, because many films will never go into production.

Equity

It is common practice in the film industry to set up a new limited company specific to a particular film. Among other benefits, this allows the film producers to sell shares in the film as a further source of finance. By buying a stake in the film company, commercial investment funds or individual investors can effectively buy an overall interest in any profits that the film eventually makes.

Gap finance

Often a film’s producers will require a further source of funding, in addition to those described in this diagram, to complete the funding package they need in order to produce the film. This is sometimes referred to as ‘gap finance’. Gap financiers will provide the money the producer needs, usually in return for a financing fee and interest that the producer will have to pay to the financier from the budget of the film. Gap financiers are often the first to be repaid once the film starts to generate revenues, making gap finance less risky to investors than equity or soft money investment.

Pre-sales

When an independent film is completed, it is handed over to a number of distributors. The role of the distributors is to maximise the ‘exploitation’ of the film. They take responsibility for the promotion and marketing of the film, they aim to make sure the film is shown in as many cinemas as possible, and they also typically negotiate deals for the film to be released on DVD, online streaming services, TV broadcast, airline in-flight entertainment, and so on.

Distributors buy the rights to distribute a film from the producers, usually via a sales agency who will charge a commission on the sale. Often, the producers can raise part of the budget for making their film by selling the distribution rights before the film is even made. This is known as a ‘pre-sale’.

In practice, most distributors will not be prepared to pay the producer any money until the film is finished. Instead, they will enter into a pre-sale contract, through which they agree to pay a certain amount for the rights to distribute the film, provided the producers deliver the film on time and to an agreed standard.

To turn these advance contracts into production funding, film producers will often source loans from specialist lenders who will lend against the security of the pre-sale agreements. Sometimes, this arrangement is also underwritten by a completion guarantee, whereby a third party guarantor will step in to complete the production of the film if the budget is overspent.

Tax credits

The UK government offers a tax credit to films deemed to be ‘UK qualifying’. These credits exist in part to make the UK an attractive place for international filmmakers to shoot or carry out ‘post-production’ (editing, special effects, etc.). As a result, many films that you might not instinctively think of as ‘British’ have qualified for UK tax credits, including Gravity and The Dark Knight Rises.

The tax credit that can be claimed is usually around 25% of qualifying expenditure (which is, in simple terms, money spent in the UK).

Tax credits are a generous and valuable source of finance for the UK film industry, but they can only be claimed after the film has been completed. For this reason, some finance companies will provide finance to film producers secured against the eventual receipt of the tax credit income.

Ready to find out more?

Our Media EIS invests in the UK’s creative sector, with a current focus on sales agencies in the independent film industry. Find out more here.

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