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Tom is a filmmaker, producer, and marketing specialist based in Los Angeles.
At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances.
You’ve got a great script, a passionate creative team, and a burning desire to share your film with the world. Now there’s just one question to answer: How will you pay for it all?
One of the most powerful tools in an indie producer’s toolkit is film debt financing: the process of borrowing money to pay for production and repaying it when your film starts generating revenue.
In this article, we’ll break down what film debt financing is, how it works, and the core debt structures that filmmakers use to move projects forward. We’ll discuss the pros and cons of each film debt structure and give examples to help you determine which might best serve your production.
In the most basic terms, debt financing involves borrowing money under an agreement to pay back the principal amount plus interest over a specified period.
If you have a mortgage, a car loan, student loans, or a credit card, you’re familiar with debt financing. Just like you might take out a loan to help pay for that new crossover SUV, a filmmaker can take out a loan to help cover the cost of their next horror-comedy feature.
In fact, along with equity, debt financing is one of a few tried and true ways that independent filmmakers finance their movies.
With equity financing, an investor owns a stake in your film and shares in its profits. Debt financing on the other hand is all about repaying borrowed funds. When you take out a loan for film, your investor doesn’t own a piece of your project indefinitely like an equity investor would. Your obligation to the lender ends once you completely pay off the debt.
That can mean more creative freedom and more upside for filmmakers who utilize debt financing, making it an attractive means of film finance. Lenders like film debt financing, too, because productions have predictable timelines and forecastable revenue streams.
Predictable timelines make it easier to structure the term of the loan. Forecastable revenue streams can provide borrowers with solid collateral to back their debt.
This brings us to three foundational concepts that are essential in understanding how debt financing works:
It’s important to understand these concepts before seeking film debt financing for your film. It’s also important to spend some time developing your project to make it as appealing to lenders as possible.
Before approaching lenders, you should have a complete script and a detailed budget based on the script. You should also have a financing plan ready.
Your financing plan will show how you plan on raising all of the money to cover the film’s budget. It can—and likely will—change as you meet with investors and assemble funding, but it’s essential that you start with a realistic plan in order to demonstrate that your project is a reasonable investment.
Every film’s financing plan looks different. Part of the challenge of funding a film is figuring out how to combine various types of film debt financing to completely fund your budget.
Below, we’ll break down the six most common film debt structures: negative pickup loans, pre-sale loans, gap loans, mezzanine loans, tax incentive loans, and bridge loans. Each offers its own set of pros, cons, and best-use scenarios.
Negative pickup loans are loans backed by negative pickup deals, a special type of film financing agreement in which a film distributor agrees to purchase a film from a producer once it’s completed, usually for a predetermined price.
Negative pickups get their name from the days when distributors would physically take possession of the film negatives after picking up the film rights. Though many movies are no longer shot on film and thus distributors can’t literally buy the film negatives, the name remains.
Securing a negative pickup deal is an independent filmmaker’s dream. It means you’ve found a distributor who will buy your movie and get it in front of audiences. Typically with negative pickups, producers negotiate a selling price that is at least equal to the total expected cost of production.
However, negative pickup deals are structured such that distributors only pay once the film is completed and delivered. This means that the money guaranteed to you by a negative pickup deal can not be used to directly fund your film’s production.
So how can you use a negative pickup to finance your film? That’s where negative pickup loans come in.
Once a film has secured a negative pickup deal, producers can use the contract from the distributor as collateral to back a negative pickup loan from a lender. The money from the loan funds production, and when the finished film is delivered, payment from the distributor reimburses the lender.
After the success of director Doug Liman’s feature Swingers, TriStar Pictures bought the rights to Liman’s next feature Go in a negative pickup. The full details of Go’s financing are not public—a film’s financials seldom are; would you share the particulars of your car loan with the press?—but it’s certain that the guaranteed sale to TriStar made funding Go much easier.
As powerful as negative pickups are in film finance, negative pickup loans have a few potential pitfalls you should keep in mind.
First, negative pickup deals usually specify an agreed upon delivery date for the finished film and a fixed purchase price. Anyone who has worked a day on set knows that productions often run over budget and over schedule.
If you can’t deliver a finished movie to the distributor on time, the distributor may have grounds to refuse payment. You will, however, be on the hook with your negative pickup loan lender, who must be repaid regardless of whether you get paid by the distributor.
If your production goes over-budget, you’ll also have to find ways to raise additional funds to cover the shortfall between the increased production cost and fixed negative pickup payment.
For these two reasons, lenders often require film’s have a completion bond before issuing a negative pickup loan. You can learn all about completion bonds and how to secure one here in Wrapbook’s handy guide, but essentially it’s a type of insurance that helps guarantee a film gets completed even if it goes over budget and over schedule.
Though negative pickup deals have become far less common as film financing evolves in the age of streaming, negative pickup loans remain one of the most secure forms of film debt financing.
Despite the risk, these loans can serve as a solid foundation for your film debt financing package when you have a reliable distribution partner lined up. If you are lucky enough to secure one, they can quickly turn your film into a reality.
If you can’t sell your film to a single distributor who will handle all distribution through a negative pickup deal, you might be able to sell the distribution rights piece-by-piece through what are known as pre-sales.
Pre-sales are distribution agreements struck with individual international distributors who buy the right to distribute your film in a certain territory or country.
A film can have multiple pre-sales, one for every international territory in which there is interest in distributing the picture. Though a single pre-sales agreement won’t cover the entire cost of production like a negative pickup deal, it can help producers lock down distribution and funding before production begins.
Every pre-sale agreement will include what’s known as a minimum guarantee, a fixed sum that the distributor agrees to pay to the producers once the completed film is delivered.
After securing one or more pre-sales agreements—usually with the help of a sales agent at a major film market—you can use the pre-sale contract as collateral to obtain a pre-sale loan.
You won’t be able to borrow the full amount of each pre-sale’s minimum guarantee, however. To minimize risk to the lender, the minimum guarantee must be greater than all the costs associated with the loan, including interest, attorney fees, origination fees, and the cost of the completion bond.
The total amount that the lender will let you borrow is called the advance rate. By securing multiple pre-sales in several international markets and taking out pre-sale loans on all your pre-sales, you can maximize your total advance rate.
One advantage of both pre-sales and pre-sale loans is diversification. If one distributor goes out of business or backs out of the pre-sale agreement for whatever reason, you’ll still have other pre-sales to back your film’s funding.
Securing many pre-sales in advance of production can also help your project build momentum and attract more investment.
The French animated feature Zak & Wowo: The Legend of Lendarys inked 13 individual pre-sale deals before going into production. By guaranteeing distribution of the film in France, Spain, Norway, the Middle East, and Mexico, among other territories, those pre-sales undoubtedly gave Lendarys’s filmmakers leverage to fund their production budget.
That said, pre-sales and pre-sale loans do have a few drawbacks.
Multiple distribution partners means more paperwork and extended negotiations. Producers must balance the terms and requirements of each pre-sale contract as they keep production on track.
Pre-sale agreements also usually require the involvement of a sales agent, a specialized film financing professional who helps broker distribution deals between producers and distributors. Sales agents can dramatically improve your project’s chances of finding funding, but they take a fee for their services, usually around 12% of your film’s revenue.
Finally, pre-sale loan interest rates vary depending on the territory and distributor. Lenders will charge higher rates for loans backed by distributors they deem less reliable and territories the deem less stable.
If you’ve sold distribution rights in some territories and believe there are other international distributors to whom you may be able to sell your film later, you might consider taking out a gap loan.
Gap loans cover your film’s expected sales to unsold territories. They are not backed by firm collateral like signed pre-sales agreements with minimum guarantees. Rather, gap loans for film rely on the projected value of unsold distribution rights as determined by a credible, established sales agent.
This last point is hugely important. You can’t just approach a lender for a film gap loan because you hope your film will find distributors in South Africa, Sweden, and Portugal. You will need to back up your conviction with careful financial projections from a trusted sales agent.
If the lender decides to provide you with a gap loan, the loan itself will work much like a pre-sale loan. You won’t be able to borrow the full amount of your projected sales, and you’ll repay your gap loans with the minimum guarantees you eventually get from selling the movie in the unsold territories.
Without firm collateral, film gap loans are clearly riskier than both negative pickup loans and pre-sale loans. As a result, gap loans have higher interest rates, which effectively reduces the amount you’ll be able to borrow against projected sales.
Gap loans can also be risky for you as a filmmaker. If the unsold territories don’t generate the revenue you expect, you are still required to repay the lender.
Yet for many producers, the flexibility of being able to move forward with production, even when some rights remain unsold, can be worth that extra cost.
If you’ve taken out pre-sale loans and gap loans but still haven’t covered your film’s budget, your next best bet when it comes to film debt financing is a mezzanine loan.
Film mezzanine loans, often called “mezz loans” for short, are not backed by pre-sales, minimum guarantees, or even a sales agent’s projection of future distribution sales.
Backed by no collateral, mezzanine loans are issued based on an expectation (i.e. hope) that the completed film will find more distributors and earn enough in revenue to cover its budget.
Mezzanine loans for film are a type of subordinated debt, which means that mezz loan lenders get repaid after lenders of senior debt (negative pickup loans, pre-sale loans, and gap loans) but before equity investors.
This intermediate position in what’s known in finance as the “waterfall” (the order of repayment to investors) is how mezzanine loans get their name. Like the mezzanine in a building, they occupy a space between two other tiers.
As you can probably tell, film mezzanine loans are riskier for lenders than all of the loans we’ve so far discussed. Consequently, they carry steep interest rates and can be difficult to secure.
Still, for indie filmmakers who have a strong track record or a high level of confidence in their project’s commercial prospects, film mezzanine loans can be a production lifeline. They allow production to proceed when other loans can’t be secured and prevent delays and creative compromise that can come with equity investment.
Many regions around the world, including over 35 US states and territories, offer film funding through production tax incentives. These government administered programs return money to local productions in the form of tax credits and rebates.
Tax incentives are a huge boon to production, and there’s a lot more to them than we can cover in this post. Thankfully, Wrapbook’s Production Incentive Center has a comprehensive breakdown of every tax incentive program in the US, including how much productions can earn back in each state and how to apply to each program.
What’s important to know here is that, just like with negative pickups and pre-sales agreements, producers can only collect the funds from tax incentives after production. Hence the need for tax incentive loans.
Tax incentive loans allow filmmakers to borrow against the tax credits or rebates they expect to receive from state or national governments.
As collateralized debt, tax incentive loans work a lot like pre-sale loans. Once a production satisfies all the requirements of a tax incentive program, including spending a certain amount on production locally, the government will approve issuance of a tax credit or rebate. The production can then use the money from the tax incentive to repay their tax incentive loan.
For example, a production might choose to film in Georgia because of its competitive tax credit. By partnering with a local lending institution, the producers can use the projected credit as collateral for a tax incentive loan. Once production wraps and all the tax incentive requirements are met, the Georgia Film Office will issue the tax credit, and the loan can be repaid.
Lenders will not let you borrow the full amount of the anticipated tax incentive, but since government-backed incentives are solid collateral, interest rates and fees for these types of film loans are typically lower than those associated with film gap loans and mezzanine loans.
On the flipside, if your project fails to meet the requirements of a given tax incentive program—such as spending requirements or specific hiring mandates—your expected tax break could vanish, leaving you without the cash to repay your loan.
For this reason, it is essential that you fully understand all of the regulations associated with any tax incentive you plan on utilizing. Along with official program websites, Wrapbook’s Production Incentive Center is an indispensable resource for up-to-date information on tax incentive programs across the country.
The sixth and final form of film debt financing you might utilize in funding a feature is called a bridge loan.
Like the name implies, film bridge loans act as a financial bridge by providing you with short-term funding while you finalize other investments.
Bridge loans for film usually have very short maturity dates—weeks if not days. Like mezzanine loans, they are not backed by collateral and are therefore very risky, so they have high interest rates. Bridge loan interest rates can be as high as 2.5% per week.
While a film bridge loan might not be your first choice given the potential interest penalties, it can prevent costly production delays and overall be worth the high price.
Imagine you’re in pre-production and working on closing a handful of pre-sale loans. Suddenly, your lead actor’s schedule changes and you need immediate funds to start principal photography before you lose the star to another project. If the actor backs out, your distributors might, too, and your film’s financing will fall apart.
On the other hand, you’re confident that you can secure the pre-sale loans soon and lock down a huge chunk of the film’s financing. This is a classic case in which a production might take out a bridge loan.
With the cash from the loan, you can start production and pay crew and vendors. Once funds from your pre-sale loan arrive, you repay the bridge loan with interest, and production doesn’t lose a step.
Though bridge loans can be costly, they are a crucial tool in your film financing arsenal. The ability to combine them with other film debt financing instruments can give you invaluable creative and financial freedom.
It’s not uncommon for film projects—especially larger ones—to combine multiple forms of film debt financing. For instance, you might secure pre-sale loans from a few territories, then top off your budget with a tax incentive loan and a small mezzanine loan to close the gap.
While juggling various financing structures can be complex, it’s also a strategy that can bring your production across the finish line on time and on budget.
If you decide to layer debt structures, be sure to keep detailed, well-organized records. You’ll need to carefully manage repayment schedules, interest rates, and collateral across multiple agreements to avoid complications down the line.
In order to make sure all of your lenders and investors are repaid properly and on time, you’ll probably want to hire a collection account manager, a film finance professional who specializes in distributing a film’s revenue to investors based on the contracts you’ve struck.
Whether you’re a first-time indie producer or a seasoned professional, setting up the right film debt financing plan can make the difference between a finished film that resonates with audiences and one forever stuck in development hell.
Film debt financing is complicated, but understanding the options—and using them wisely—can give your production the boost it needs to thrive.
Need more insights? Check out our comprehensive guides on production budgeting and film financing to strengthen your financial strategy before you dive into film debt financing.
Ready to roll cameras? Run production and payroll and accounting seamlessly with Wrapbook, a force multiplier for your production finance and accounting teams.
