Whether you’re a seasoned filmmaker or newcomer to the industry, understanding the various financing options available to you is crucial to the ultimate success of your film. The two most common avenues for financing films are taking out a loan from an individual or lending institution (also known as debt financing); or attracting investors to invest in your film (also known as equity financing). While both options ultimately can provide the capital you need to produce your film, they differ significantly in terms of structure, risk, and control.
Taking out a loan to finance your film involves borrowing a sum of money (the amount you need to produce the film) from an individual, a lending institution such as a bank, or other specialized film financing institution that may act as a completion bond guarantor. This borrowed money is expected to be repaid according to the terms outlined in the loan agreement or promissory note. The most important terms in these agreements include the principal amount the lender is owed in addition to interest payments on a predetermined payment
schedule.
It is important to realize that the loan is a debt obligation, and you, as the borrower, are legally obligated to repay the borrowed amount regardless of the film’s ultimate success or failure. Thus, while the money lent to you to produce the film might feel like an “investment” in the film, the person or institution providing you the money is not an “investor”—they are a lender and expect timely repayments of the principal amount owed to them plus interest. One of the primary advantages of securing a loan is that it allows you to retain full ownership and creative control of your film, since the lender has no ownership stake in your project (this differs significantly from an “investor” in equity financing as described below). Nonetheless, it is essential to recognize that failure to repay the loan, or any expenses the lender expects recoupment of in relation to the film, can absolutely have legal consequences.
In contrast to lenders, investors provide you funds in exchange for a stake in the film’s potential profits (plus a premium rate of return on the amount invested, of course). Independent film projects are often structured as limited liability companies (LLC’s). Investors can be offered membership interests in the LLC, which in effect represent an ownership stake in the film itself. This creates an arrangement where investors provide money to you upfront so you can first produce the film, and then subsequently in return, the investors hope to share in the proceeds generated by the film. Unlike loans, investors with membership interests in the LLC (and therefore the film itself) are still entitled to repayment of their capital contributions, but the return is tied to the financial success of the film and is based on the film’s proceeds.
There is a bigger risk for the investor in this situation, since there is a chance that they may never be fully repaid, but there is also a bigger upside, since these investors usually get to share in the overall profits of the film. So, while it may seem intimidating to grant an ownership share in your project to an investor, they are often motivated to make sure the film is a success so they get to enjoy those profits as well, which can work in the favor of the production.
Both lenders and investors provide valuable options for financing your film, but it is essential to understand these fundamental differences between the two. Understanding the pros and cons of both options while having the assistance of an entertainment attorney along the way can help you make an informed decision about which approach best aligns with your film’s risk tolerance, needs, and goals.
If you are seeking expert guidance in financing your film, reach out to Ameri Law, serving Beverly Hills, CA; Los Angeles, CA; Hollywood, CA; and throughout CA.
