2 The bank loan

Banks do not invest in films. They lend money to film projects which enables the producer to cash flow their production.

Banks loans are backed up by collateral or security in the form of film assets, which are in the main pre-sales distribution contracts and in some jurisdictions tax incentives. But lending money to a film production is still a relatively risky activity.

Judith Chann, head of the media department at the UK private bank Coutts, outlines three important considerations when she is evaluating whether or not to lend money.

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Transcript: Video 5 Judith Chann outlines considerations when lending money.

JUDITH CHANN

We are one of very few banks I think inside the UK that provide film financing. And I think it's a function really banks understanding or not understanding the business. In the US, however, there are more banks I think who understand the business. And key is to understand the risk and if you understand the risk then I think you'll be more prepared to lend on, if you like, an asset such as a film. So how do we lend? I think certain criteria needs to be met. The main ones of which are the following.

 So the first is I think we would only wish to work with produces who demonstrate that they have a good track record and ability to deliver. And if they don't and they're producing a film for the first time, is to have someone attached to the project that has that experience and can guide them and could give us confidence as well. So that's very important to us. Secondly they should be a completion guarantee in place. Completion guarantee is very important to us because they insure on our behalf, on any finance's behalf, that the film will be completed and delivered on schedule and on budget. And should anything go wrong, that they would step in and complete it.

 And it's important to us because it will then trigger payments from distributors, which then is our source repayment ultimately. Following assessing the risk of the actual producer to deliver that, the availability of a completion guarantee, we need to ensure that we have security in the form of some pre-sale distribution contracts. Which is important again in terms of for us to assess the credit worthiness of these distributors, their track record in paying and ultimately whether they will be able to deliver the film. So hence these three parts, these three components, if you like, will ensure that we get repaid.

 We have shied away from lending against future sales because that's inherently more risky because then you're relying on not just the film being delivered but you're actually taking a creative decision to actually- Well you have to believe that that film will actually be able to be sold later on after it's been delivered. And of course if its tested in the market and it transpires that the film isn't what everyone thinks it is, then you might not get any more sales. And if you don't get sales, then you don't get repaid.

End transcript: Video 5 Judith Chann outlines considerations when lending money.

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Video 5 Judith Chann outlines considerations when lending money.

Before agreeing to provide a loan to a film project, Judith assesses the project on three levels.

Firstly, the reputation of the producer or their colleagues is extremely important. A producer with a ‘good track record’ gives the banker a certain amount of comfort or confidence in the project.

Secondly, the completion guarantee provides expert, third party reassurance that the production team is likely to deliver the project on time and to budget, and that if it all goes wrong, the guarantor will step in and complete the project. (In Week 6 you will meet the completion guarantor, James Shirras, Managing Director of Film Finances, and learn more about his role, and in particular the role his company has played in the history of the business of film in the UK.)

Finally, in the pre-sales contract, the distributor undertakes to repay the bank on delivery of the film. Much depends on whether the bank is persuaded that the distributor can and will pay back the money.