I am frequently asked questions regarding different financing terms and financing sources, such as what’s the difference between senior debt and mezzanine? What exactly is gap financing? I am still amazed to hear naïve producers’ state that a bank is going to fund their film.
Banks do not finance films – they lend money against collateral on the film such as presale contracts and license agreements. And the collateral must be from a company with strong assets to guarantee the bank gets back their loan amount and expected interest.
The following is a list of financing terms and a short definition as well as what each level of financing expects for their money. Every Balanced Producer should know these terms. It is in order of priority of return on investment from the film’s revenues:
• Senior Debt – principal + interest. No profits or rights
Banks cash flow presales contracts & foreign sales estimates (sometimes referred to as Gap) & license agreement & tax incentives/rebates
• Mezzanine – principal + interest + small portion of the profits
Funds cash flow foreign sales estimates (sometimes referred to as Gap) & tax incentives/rebates
• Equity – cash for large portion of profits & possible rights/ownership
• Typically 110% – 125% Return on Investment (ROI)
• Typically 50% of Net Profits if funding 100% of the film’s production budget
• Typically Producer takes all talent profits out of their 50%
• Venture Capital Fund (VC) – investment fund that manages money for those wanting to invest in small to mid-sized companies.
• Hedge Funds – fund of investors money for highly speculative investments
I hope this clears up some of the chatter and confusion out there. Let me know if you have any further questions.