Film Financing

There are many ways for film companies to get the proper finances for their film. One way film companies get extra funding is called product placement where for example, in the James Bond films, he always drives an Aston Martin, so Aston Martin pays the film producers to use their cars in the James Bond films. Another way to get film financing is Government Grants, this is when a number of governments run programs to subsidise the cost of producing films. Governments are willing to provide these subsidies as they hope it will attract creative individuals to their territory and increase employment. Also, a film shot in a particular location can have the benefit of advertising that location to an international audience. Government subsidies are often pure grants, where the government expects no financial return. Another way of film financing is tax schemes. A number of countries have introduced tax legislation that has the effect of generating tax deductions for producers or owners of films. Schemes are created which effectively sell the tax deductions to wealthy individuals with large tax liabilities. The individuals pay the producer a fee in order to obtain the tax deductions. The individual will often become the legal owner of the film or certain rights relating to the film, but the producer will in substance continue as the real owner of the economic rights to exploit the film. However governments are beginning to recognise that tax deductions are an inefficient way of supporting the film industry. Too much of the tax benefit is siphoned off by promoters of the tax scheme. Also, films with little commercial or artistic merit are produced simply to generate tax deductions. In 2007 the United Kingdom government introduced the Producer's Tax Credit which results in a direct cash subsidy from the treasury to the film producer. Another example of film financing is private equity financing. Generally tax-advantaged film and television investment for individuals comes with little risk. Most often, the cost of production is recouped by a combination of federal and state tax incentives, thereby eliminating most of the risk. The main source of film financing is debt finance. There are four different ways of financing; Pre-sales, TV-presales, negative pickup deal and gap/supergap financing. Firstly pre-sales is based on the script and cast, selling the right to distribute a film in different territories before the film is completed. Once the deal is made, the distributor will insist the producers deliver on certain elements of content and cast, if a material alteration is made, financing may collapse. In order to gain the “big names” essential for drawing in an international audience, distributors and sale agents will often make casting suggestions. Pre-sales contracts with big name actors or directors will often have an "essential element" clause that allows the buyer to get out of the contract if the star or director falls out of the picture. The reliance on pre-sales explains the film industry's dependence on movie stars, directors or certain film genres. Upon signing a pre-sale contract, the buyer will pay a 20% deposit to the film's collection account, with the balance due upon the film's delivery to the foreign sales agent. Usually a producer pre-sells foreign windows/rights so that the producer can use the value of those contracts as a part for the production loan that is provided to finance the production. Secondly, TV pre-sales is more usual for a producer to sell the TV rights of a film after it has been made, it is sometimes possible to sell the rights in advance and use the money to pay for the production. In some cases the television station will be a subsidiary of the movie studio's parent company. A negative pickup deal is a contract entered into by an independent producer and a movie studio wherein the studio agrees to purchase the movie from the producer at a given date and for a fixed sum. Until then, the financing is up to the producer, who must pay any additional costs if the film goes over-budget. Superman and Never Say Never Again are examples of negative pickups. Finally, gap/supergap financing is a form of debt financing where the producer wishes to complete their film finance package by procuring a loan that is secured against the film's unsold territories and rights. Most gap financiers will only lend against the value of unsold foreign rights, as domestic rights are seen as a performance risk, as opposed to more quantifiable risk that is the foreign market. This means that the foreign value of a film can be ascertained by a foreign sales company by evaluating the blended value of the quality of the script, its genre, cast, director, producer, as well as whether it has theatrical distribution from a major film studio all of this is taken into consideration.