A common financing vehicle for independent films is â€śPre-Sales.â€ťÂ The phrase is often thrown around among producers and distributors in every day conversation.Â However, as more and more content creators are getting involved in bringing script to screen, everyone is trying to understand how this prominent financing tool actually functions.
I asked Joe Woolfe, Executive VP, Media and Entertainment Finance at One West Bank, to break down the basic parameters of this type of â€śasset base lending,â€ť including the timeline, collateral and paperwork involved in order to mitigate the key risks with these types of production loans.
Kathryn Arnold:Â Joe, we all know producers must get their ducks in a row before coming to the bank for a production loan.Â In addition to a detailed cash-flow budget and timeline to produce the film, a producer must bring some form of collateral to the table in order to get a loan.Â Pre-sales being one of the most common forms of collateral, can you tell us in laymenâ€™s terms the exact mechanics of a pre-sale?
Joe Woolfe:Â Sure.Â A pre-sale is a license to a third party distributor to distribute a film in a given territory. In order to obtain the license, the distributor must put up aÂ â€śminimum guaranteeâ€ť, which is effectively an advance.Â These advances are â€ścontracted receivablesâ€ť whereby after the film has been completed and delivered to the distributor, the distributor has the obligation to pay the producer a specific amount for its right to exploit the film in their territory.Â These receivables serve as the basis upon which the bank makes the loan.
KA:Â Does the producer get the same amount from each territory?
JW:Â No.Â What is unique to film finance is that each receivable is individually discounted based on the risk of the specific distribution company in the territory.Â What that means is that we must gain knowledge of the distributor in each territory, their payment history and/or reputation in the market.
KA:Â So one distributor in France may have a better reputation than another, and thus their paper will be more valuable and discounted less?
JW:Â Exactly.Â In addition, each receivable may also have varying payment terms, based on the distributorâ€™s risk profile, including progress payments or contract support through a bank-issued letter of credit.Â Similar to construction finance, loans are drawn down over time and used to fund detailed approved cash-flows over the course of the production and delivery phases of the film.
KA:Â Do you work with third party companies to oversee the production funding and cash flow to make sure the money is spent where it is supposed to be spent?
JW:Â Yes.Â We require a bond company to oversee the production and budget to ensure that the project is completed on time, on budget and delivered to the distributors in accordance with the technical specifications needed to trigger the contracted payments due.Â Additionally, all collections of receivables are directed to a bank-controlled lockbox until the loan is fully repaid.
KA:Â From these basics it is clear that prior to making a decision as to whether to fund a film, the banks look at the reputation and experience of the producer, the creative elements, and most importantly, the sales agent representing the film:Â How many films has the agent sold?Â How well did their films do? How reliable are their estimates – in terms of what they have stated, what they have sold and what they have received in terms of payments?Â What is the caliber of the distributors the sales agent works with in each territory?
Each territory has A-list distributors, followed by lower tier distributors, who are each evaluated by the bank and given a rating.Â These ratings determine whether the bank will accept that distributorâ€™s paper (their pre-sale license agreement,) and if they do, how much they will discount that paper.Â The discount rating determines the ultimate amount of money the bank will lend.
For the producer, film financing becomes a complex puzzle that must be strategically aligned in order for all the numbers to add up.Â Higher quality sales agents and distributors require fewer sales than newer less experienced companies, whose paper will be more highly discounted, and thus the net to the production is less.
As important as it is to understand the process of pre-sales financing, it is not required that the producer does the pre-sales themselves.Â It is a multifaceted niche inside the larger spectrum of the overall film industry.Â Â Unless as a producer you are thoroughly knowledgeable about the distributors in each territory, you are much better off contracting with a sales agent who understands the nuances of pre-sales.
For more information on sales agents, sales agency contracts and other valuable information you can go to the Independent Film & Television Alliance.
Another interesting article on the current state of pre-sales from Colin Brown at Slated.comÂ “Film Pre-Sales Get Their Own Rewrite”