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Bad News: It’s Harder Than Ever to Finance Ultra-Low-Budget Films

Good news: $250K is the new $2.5 million, thanks to technology

One of the things big-budget producers take for granted is their access to film financing. Gap loans, presales, tax credits, equity investors — these are items on a menu to be ordered up and combined in whatever way works best.

In bars around the world, broad-stroke percentages are scribbled on the backs of napkins during conversations that go something like this:

FINANCIER: So how much do you need?

PRODUCER: (gesturing to his napkin) That’s the best part! See here, if you put 10% into escrow, I’ve got a guy who’ll match it, then just some soft-money-presales-n-gap and we’re there.

FINANCIER: (handing him two bags of cash) You’ve got yourself a deal, my friend.

But almost all ultra-low-budget producers can tell you that their financing structure fits on something much smaller than a napkin: probably a postage stamp. It’s basically one number: 100. In the under-$2 million range, the option is 100% of the money upfront or zero. That’s pretty much it.

You might have a good script, a talented cast, an experienced crew, a director with terrific "indie cred," a small budget and a huge upside, and yet no investor, packaging talent agent or lender will talk to you. Why?

In my experience, lower-budget films are just too combustible: 90% fall apart prior to completion.

Generally speaking, one of the main obstacles to raising funds for films under $2 million is their inability to qualify for a completion bond, which insures for the investors that a fully financed film will be completed. Without this insurance, no one should invest in the project.

Without investors, the producer is forced to raise the entire amount from friends and family — or via credit cards, a financing option I do not recommend, no matter how small the budget.

Unless the movie is a creature feature, it usually won’t have a marketable star attached, which is what foreign sales agents (who license the film’s rights to the international market) need so they can provide an estimate of the film’s foreign value that a bank will lend against. These "bankable" sales estimates are the foundation for the type of financing structure that mainstream investors and lenders understand.

Film financing is like playing Monopoly. Buyers might not have the resources to buy Park Place, but that doesn’t mean they’re interested in Baltic Avenue — not if they can get a reasonably good deal on Marvin Gardens.

Lower-budget movies usually come with less experienced personnel, from the caterer to the director.

For investors, this means they’ll probably be dealing with an inexperienced lawyer during the deal. Not to cast aspersions on anyone’s attorney, but the reality is, the more adept the lawyer is at film finance, the easier the deal is going to go for everyone involved. A film closing is not the best time for a steep learning curve.

Often, the paperwork on lower-budget films is in disarray. (I once spent six weeks cleaning up a film’s chain of title, just so I could proceed with the financing, which then took an additional eight weeks.) Sometimes the extra work and resources required to close the financing on certain projects might not be worth the possible "upside" on the deal.

Which brings me to the real reason low-budget films have a harder time getting financed than bigger-budget films: It takes just as much commitment to get a $500,000 film made as it does to get a $15 million film made. As far as investors are concerned, the potential dollar-for-dollar returns don’t justify the allocation of resources required. Everyone associated with financing, sales, marketing and distribution will be working just as hard.

Contrary to popular opinion, most low-budget films are not going to perform like "Paranormal Activity," "The Blair Witch Project" or "My Big Fat Greek Wedding." I tell filmmakers, don’t ever include these films in your prospectus. It’s like using the lottery as an example of how to get rich quick.

Just to be clear, this is not about bashing low-budget indies. I’m just frankly addressing the question that has been posed to me several times a day since starting FilmClosings.com: Why are they so hard to finance? There is still a place and a market for low-budget indies; it’s just a different type of market with fewer set points of entry than for higher-budget indies. The reality is, ultra-low-budget films have to overcome bigger obstacles to achieve lower cash returns.

There is some good news, budgetarily speaking: $250,000 is the new $2.5 million. That’s right. Due to the down economy, along with major advances in affordable technology, you can now create for $250,000 what was once the purview of $2.5 million films. In addition, once your film is complete, you don’t have to try very hard to sell $250,000-plus in foreign territories, so that makes for a pretty good return on a $250,000 film, even after you net out the costs of sales.

There is light at the end of the tunnel for the ultra-low-budget film. I’ll talk more about possible avenues for low-budget financing in my next post.

Jeff Steele is a noted film finance expert and owns the website FilmClosings.com.  Most recently, Jeff was CFO of Magnet Media Group, an equity finance, production, and distribution fund for $10 million - $50 million feature films.  Before that, Jeff was the director of film finance for Screen Capital International and a producer for Sony Classics' "Who Killed the Electric Car?"