1.1 Three principal sources
There are three principal sources of film finance: licensing of rights, ‘soft money’ and equity investment.
1. Licensing of rights
Sales agents and distributors are essential in arranging for distribution around the world. They can pay money for the rights to a finished film. They can also ‘pre-buy’ rights to a project before it is made, in which case their money is used as finance to make the film. From the producer’s perspective, these transactions are often referred to as ‘pre-sales’.
Often the distributor will not actually put up money until the film is delivered to them, but rather enter into a contract to pay a certain amount when the film is made as per the script, with the actors as specified, and delivered to them. It is this contract that the bank lends against.
2. Soft money
Many governments around the world are keen to support film-makers and to help ensure that films reflecting national culture are available for their citizens. They also realise that film production involves spending a lot of money in the local economy – so there are positive economic impacts to attracting production spend. They therefore offer support to ensure that national films are made. This is often known as ‘soft money’ because the terms under which it needs to be paid back are less strict than for commercial investors and, indeed, it may not need to be paid back at all.
There are two different kinds of soft money:
- automatic support – many governments offer so-called ‘tax incentives’ (or ‘tax credits’) to film productions, which may or may not involve the tax system. These are payments made to a production based on the amount of money that production spends in the country. The arrangements can be complex, but simply, the UK offers an effective rebate of 25% of what a production spends in the UK as long as that production passes a UK cultural test (this was mentioned earlier in Week 1). This support is ‘automatic’ because the film-maker can be sure that if the film qualifies, the money will be forthcoming. This kind of support is offered by the UK, Germany, France, Czech Republic, Hungary, Canada, Australia. Note that these incentives have been extended to many other creative industries in the UK.
- discretionary support – many countries (but not the US or India) have government bodies with funds available to support the development and production of films. These bodies will look at film projects and decide whether or not they are sufficiently interesting and culturally significant that they should be supported. These are referred to as discretionary because the film body makes a decision and the film-maker cannot count on this support. In the UK, the BFI has a film fund for this purpose, and funding is also provided by bodies such as Creative England.
3. Equity investment
Commercial funds, individual investors and industry players may make an equity investment in a film. This means that they do not pre-buy rights to individual territories, but they buy an overall interest in the profits of the film. This can be a risky investment because many films do not earn a profit. However, it is a fairly common element in a film financing package. Some examples are:
- There are commercial funds that are often ‘tax advantaged’ – the investor gets a write-off if making the investment. This encourages investment. One such scheme in the UK is Enterprise Investment Schemes (EIS).
- A broadcaster like Film4 or BBC films will usually invest in the film in terms of a pre-buy of the license to show the film on TV alongside an equity investment component.
- When friends and family invest in a film, they usually make an investment in the form of equity. Often the motive here is more to support the film-maker than to generate an economic return.
In addition to these three sources, banks can play an important role in the financing process by lending money to the production, though banks don’t invest in the sense of earning a share of profits. You’ll learn more about this as the week progresses.