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Industry Financing

Studio filmmaking is an insiderís game. Yes, occasionally a Spike or Quentin becomes hot and then they can play with the big guys. Many other producers shuffle around the studioís, spend years in development, and never get anything made. Studios are in the business to make movies, so for many, this is the first stop on their hit list. Although for neophytes, let alone seasoned pros, it is a very tough pathway. 

The filmmaker starts out by trying to pitch their project to a studio. If the studio likes the idea, they will usually try to attach a writer to write the script. You will do your best to stay attached to the project yourself as some sort of producer. Eventually your best option and hope is to get bought off. 

At any number of milestones the studio can pull the plug and the project ends up dead in the water. It is extremely hard to resurrect the project anywhere else or even get the property back since the studio has paid for its development. If the film does get made, the studio will distribute and market the film as they see fit.

You as a producer (if still involved at this point) will find it extremely difficult to find an ear to listen to anything you have to say. If the film fails its test screening or opens poorly, the studios will take it off the screens immediately to cut their losses. Until youíve demonstrated your ability to make commercial, studio-like films you will not be taken very seriously in the industry, especially by the head-honchos of the studio world.  

independent distributors are clearly more suitable for small, low-budget films than a major because the distributor, having fewer pictures to release, will give it more attention and have the marketing know-how for a specialty film

Besides the 15 to 25 films that each studio releases a year, there are hundreds of films released by the smaller, independent, non-studio related distributors. These include New Line, First Run, Concorde, Miramax and numerous others. Most do not fully finance films but they may co-finance low budget films for a portion of the rights. 

These smaller independent distributors are clearly more suitable for small, low-budget films than a major because the distributor, having fewer pictures to release, will give it more attention and have the marketing know-how for a specialty film. Other, alternate forms of obtaining financing for films include loans through banks. Films are frequently financed through bank loans. 

The good news about loans is that they generally do not include equity participation. You borrow the money, you pay it back. The bank does not share in the net profits generated by the film, nor does the bank have any creative control in the film being made. This is especially appealing to independent filmmakers who are afraid that by signing with a studio their entire project could be rearranged.

A scary thought concerning banks is that they will always want some kind of collateral for loaning out the money. This can either be in the form of tangible property, or, in the case of a film, the film itself and all its rights. The bad news is that loans are not investments and have to be paid back. 

If your distributor does not fulfill their obligations, you may be left holding the bag and your film and personal assets may be at risk. Studio deals are very much like bank loans with very high interest. Hence the difficulties in ever seeing any net profits.

Other financing sources utilized in the industry include presales, getting foreign sales agents or foreign financing, gap financing, private investor financing, active investor financing, joint venture financing, corporations, grants, and international co-productions.

Equity financing (through a limited partnership) is the route that nearly every independent filmmaker chooses to take

There is a whole range of ways to finance your film. Be as creative as possible. Select a form that you feel most comfortable with. Equity financing (through a limited partnership) is the route that nearly every independent filmmaker chooses to take. Why? Because the first-time filmmakerís resources are mostly family and friends, and not the traditional sources of film financing. 

An independent filmmaker who tries to go through traditional industry financing routes may spend three or four years trying to package actors, get presales made, find distribution, banks and completion bond companies, get embroiled in the seemingly endless catch-22 situations, and end up exhausted, broke and unable to realize his vision in a reel of film. 

Obtaining investments from family and friends, and supplementing this with their credit cards, is how the great majority of first-time filmmakers get independent films made. Since you typically donít have the money yourself, you will have to rely on your passion, negotiating skills, and a spectacular script to attract name actors and other key players to your film.

Financing: Limited Partnership vs. Industry
Financing your film is considered by many the most difficult aspect of filmmaking. No one likes to go out and ask for money, but if you are a filmmaker this will be a necessary part of your life and skill you must develop. The limited partnership: this is one legal form that is used to finance business ventures of all kinds. When preparing your package for investment remember that simplicity is best. 

If you have a well-thought-out plan that is easily understood by investors, then you are on the right track. Try to be as creative in financing your film as you are in writing your script. The seven basic elements that you will need to have before you can raise your financing are as follows: a commercially viable film concept, a great script, experienced (or if not, passionate and communicative) director, strong recognizable cast, appropriate scale budget and production schedule, income projections and a limited partnership agreement.

Many films are funded based on the abilities of the director. Through the study of film at directing schools, it is common to teach that the total obligation of the director is to please the audience and not themselves. This is generally the practice of Studios; pleasing the audience brings in the money. Independent films may differ in this aspect. Although pleasing the audience is always a factor, one of the things that make independent filmmakers special is that they make their films as an expression of themselves, their experiences or a story they feel needs to be told. 

If you are a first time director, then you really have to demonstrate your unyielding willingness and persistence of vision at every turn so that investors will be compelled to support your efforts. If this is not the case, then, as a producer you will need to find a director that you can stand behind to get the job done. If you are the producer, then it's your job to find the story and get a good script written which will attract a good director. 

Clever directors and producers who are just starting out find ways of telling their stories for very little money. The more you are able to do for the least amount of funding, the easier it will be to attract money. 

Obviously investors want to minimize their risk as much as possible. When they see a project that is well designed and can be simply but uniquely shot, they may be willing to take a chance on your proposed film. Investors are not only private individuals but also distributors who give money advances to filmmakers. Therefore, your project needs to have enough money for you to accomplish your mission, but not need so much that you will never be able to raise it. 

You have to show that you can make a tremendously creative film for a little amount of money when you are just starting out. The money will follow if you can prove yourself through your first few projects. This may mean that you will have to defer your fees until the film goes into distribution. Or perhaps defer all cast and crew fees as well, or pay partial fees. This should all be discussed and well documented with everyone involved before production begins. Once your film is complete and you start bringing in profit, you can pay back those that worked on and supported the film. 

If you know your intended audience, you can realistically compare it with recent, similar genre independent films. By studying the performance and sales records of these films, you can begin to project the markets into which you will be able to license your film. Perhaps there will be a limited theatrical run, then cable and home video sales. Your income projection pages will describe to what degree these distribution avenues return income to your investors. 

If your budget is low, and you are able to make sales in the U.S. and abroad, you may be able to show your investors that the film will make a profit. If you can truthfully and realistically demonstrate that your film will make money, you will find investors. Do not go out looking for investors until you have thought through your entire project and assembled the above elements including the legal document: a limited partnership agreement. This legal document describes how money will be raised, and spent, and how the business of the partnership will be run. 

Many filmmakers actually find potential investors before they have their legal documents. This may be an unwise choice; by the time their lawyers draw up all the necessary papers, the investors change their minds. Your entire plan, from script synopsis, marketing plans, budget, income projections, and more are written up in a legal format and included in your limited partnership agreement. 

You can structure the deal anyway you like, but usually the limited partners are paid back their investment first and then receive 50% of the net profits
The way most filmmakers raise money for their independent films is through the limited partnership. It is the simplest and easiest of all legal structures to set up and understand. Limited partnerships are a very common business form for funding all kinds of projects. Most lawyers are familiar with them; however, producers should only work with experienced entertainment attorneys in preparing their documents. 

They cost from $1,000 to $3,000 or more depending on the complexity of your project. In a limited partnership there are one or more general partners who run and oversee the management of the business. The limited partners are those who are passive and do not participate in any creative or management decisions. They are limited in their liability only as far as what they have invested and nothing more. If the production goes over budget they are not responsible for contributing more money. If the film loses a lawsuit, they are not liable to pay settlements. The general partners assume all the liability. 

The limited partners invest money, which is spent on the film's budget. In exchange for this investment they receive a percentage of the profits, usually in proportion to their capital contribution; the greater their investment the greater their percentage of profits. 

You can structure the deal anyway you like, but usually the limited partners are paid back their investment first and then receive 50% of the net profits. This may seem like a lot but that's what it generally takes to get others to take a risk on you. Although you may have all the confidence in the world in yourself and your project, investors do not see this as a guarantee. Investors see dollar signs; the amount they dish out and the amount they hope to receive in the end. There are no rules for limited partnerships and you can be as creative in designing a win-win situation for yourself and your investors as you deem fit in each situation.

Sometimes you will hear that you should not use the limited partnership format because too many people have been burned by it in the movie business. However, it's not necessarily the limited partnership form that causes people to get burned. The real reason may stem down to unrealistic expectations, whether it is that the film just doesn't perform or deals are made with less than credible people. 

Limited partnerships give the producer the greatest freedom to operate the business and get the film or video made with the least interference from the investors. The bottom line is, it's not the form that matters. More importantly, it's how well conceived your project is, how timely it is, and whether distribution channels can be exploited for your project by reputable companies.

Developing and making the film is one thing; getting it marketed and into distribution is another. When you set up your limited partnership, make sure to have 5% of gross revenues flow back into the production company's bank account for distribution and marketing expenses. If you don't include a contingency for this in your budget and provide for future income to help cover these costs, you'll find yourself in an arduous position. It comes down to where you have finished your film but have no money left to market it to distributors. 

Raising money from other people is not something to engage in lightly. It is a very serious contract between you and "the money people" and you'd better be as certain as possible that you'll be able to do what you say you will do or suffer the consequences. False claims of fortune could wind you up in lawsuits with investors. If friends or family members are your investors and your project fails, it is possible bitter feelings could result. This may be one good reason to deter from having those you know enter into a business relationship with you. 

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