Films make vast sums of money, so they should be self-funding, shouldn’t they?

Some films make vast sums of money, but they also cost vast sums of money, and they are also capable of losing vast sums of money, or just breaking even, leaving nothing in the pot for the next one. Plus, when we talk about the ‘film industry’, we tend to be talking about quite a specific part of it: Hollywood–and high-end Hollywood at that.

How Are Films FundedThe industry is far bigger than just Hollywood, and the majority of films, even though they are lower budget, can really struggle to break even let alone make money. So how are they funded?

Banks

In the early days of cinema, when the studios were just starting up, they struggled to find funding from the major banks. This was partly because cinema was a new medium and no one was really sure what sort of an investment film was, and partly it was because of an unpleasant anti-Semitism that stopped the banks from doing business with the predominantly Jewish-run studios.

It proved to be their loss; film was not a safe investment but when it paid off it had the potential to do so massively. The one bank that would lend to the studios was the Bank of America, an Italian run firm founded by A. P. Giannini who had no problem with doing business with the Jewish studio heads. This remarkable decision was one that started the Bank of America on the road to becoming one of the biggest banks (and indeed companies) in America today.

Because of the global recession it is more difficult to get a bank to loan money to a film production company today than at any period since the early days of cinema. That said, the entertainment industry has been hit far less severely than most, box office takings seem to be climbing (historically people do go to the cinema more in hard times, regardless of the expense: they need cheering up). Film therefore remains a good proposition for banks but only if it is the ‘right’ film.

While box office takings are generally up, the recession does mean that people are less likely to take a chance on a film that they are not sure they will enjoy, in other words; blockbusters are fine, and independents suffer.

Bank Loans

How do you get a loan for a film from a bank?

In a word; preparation.

Okay, it’s not quite that simple, but if you are an independent producer applying for a loan for a film then the better prepared you are the better that chance that you have. The first important thing to remember is that banks are not investing, they are loaning, they are 100% motivated by profit and, although they are looking to make money out of the loan (via interest etc.) they will not lose money. The way they can guarantee that is with a completion bond.

Very basically, a completion bond is like taking out insurance on a production being completed: if the project does not get finished, the investor will get their money back and the production itself can end up being owned by the bond company (Terry Gilliam’s The Man Who Killed Don Quixote is a famous example of a uncompleted film now owned by its insurer).

But even with such a guarantee, banks are cagey about loaning to production companies because they are running a business and are looking to make money, they are not looking simply to not lose it.

Banks therefore have a complex approvals process for loans that requires a huge amount of information, including an itemised breakdown of the film’s budget, a distributions and release strategy, information on any other investors or financially interested parties, the projected box office of the project, the track record, history and current financial situation of the production company, biographies of all the major personnel involved, the content of the picture, the demographic at which it is targeted and the success of similar subjects aimed at the same demographic in recent years, references (preferably from other financial institutions) and of course the completion bond itself.

Specific banks will have other specific requirements and all banks will have their own detailed application forms.

Where applying for a bank loan is concerned there is no such thing as too much information or too much detail.

Private Investment

No doubt because of the increasing difficulties in getting a bank loan for film production companies, there are more and more producers and companies going to private investors. While banks offer a loan, a private investor is more likely to buy a piece of a film in return for a percentage of the profits.

This is of course potentially a greater risk than that which the banks take but it comes with the possibility of a much greater reward, and since many investors will still insist on a completion guarantee the risk is not too great for them. But it is a very great risk for a production company, they stand to lose a great deal if the film has to be shut down for any reason and if the film goes well then the profits will not be coming solely to them.

Unless they have a close relationship with their investor, most production companies turn to private investment because they have been turned down by the banks, leaving themwith no choice.

In a way the US film industry is founded on private investors via the hugely controversial 1915 film, The Birth of a Nation. Received wisdom in America at the time was that audiences would not sit through films longer than an hour, and that was pushing it a bit, director D. W. Griffith’s plan for The Birth of a Nation was for it to be over three hours long.

No studio would fund it so Griffith begged money from as many private investors as he could. Griffith guaranteed they would get their money back so they complied, even though most thought he was out of his mind. In the event of course the film became possibly the most profitable of all time .

The investors all made a fortune, far, far more than Griffith himself. Among those investors were such men as Louis B. Mayer, whose name still survives as the second M in MGM. Mayer’s fortune, and that of many like him, was made by his investment in the film, it founded some of the biggest studios in Hollywood. On top of its importance to specific men, The Birth of a Nation did something more important still; it proved to the majority who still thought cinema was a fad and that there was no money in it, that it had the potential to be a hugely profitable industry.

In this way private investment founded film as an industry and a business, for better or for worse.