Monday, 1 September 2014

Secrets of Independent Film Finance Revealed

How do you finance an independent animated feature film? And what is Gap Finance? If you are trying to raise funds for a movie, gap finance is something you need to understand. In brief, it's the point in the funding process where you bridge the gap between what you have been promised, and what you actually have in the bank to start making your picture. At the European Media Forum Closing the Gap, Ian Hutchinson of Silver Reel partners explained what Gap Finance is, and how it actually works.

Ian Hutchinson
Ian Hutchinson introduced Silver Reel as a "quite new" finance company. They are fairly small, and they are in essence a debt fund, that is to say they "they provide finance against tax credits and pre-sales, in other words - Gap Finance". However, it is important to understand what they do not do. "They do not do development and they do not take big risks." So, if you are looking for a business angel or equity investor to get your project started from scratch, these are not the folks to talk to. However, if you've got some of the way towards financing your film, you will need to talk gap finance.
Ian financed over 80 films with Bank of Ireland

Ian Hutchinson described himself as an investor "with a banking background". He has "financed over 80 films at the Bank of Ireland", before leaving to found Silver Reel. What does Silver Reel do? The answer is: "project finance for high end independent films, in the region of £5-40 million. Their credits include Killing Bono, Iron Clad, Railway Man, LoveBirds and Jobs, the movie about Apple founder and entrepreneur Steve Jobs.

Silver Reel gap financed Grace of Monaco

What does Silver Reel Do Exactly?

To start with, Silver Reel "only finance films that they believe in creatively". Ian does not read the script of a movie himself - he leaves that to his creative team - ie script readers. Silver Reel "employ people to read scripts, and to give coverage". [What is coverage? Coverage is the process of giving notes on and evaluating a screenplay - Ed]. In essence, the script readers and Silver Reel "evaluate the value of the product". How do they do this? By "looking at comparable films". They ask themselves the question - "will this film work around the world? What will territories will buy it?". There is a process, and "every box must be ticked". Generally, "buyers [of movies] are conservative". At Silver Reel, "they want everything". In short, they want "great numbers, a brilliant director, a great script, a low budget, a high value for the project, and a star cast". Tick all of those boxes and you are in with a chance.

Film finance is a jigsaw puzzle. Image: Wikipedia

What elements do you need to put in place?

For starters, a sales agent. "Your Sales Agent is the single most important element in the film finance jigsaw puzzle." But beware - they are not all created equal. Before accepting a sales agent on board, you or your producer "should check with your financiers to see if they are acceptable". The question to ask is "are they big and strong enough" to sell your movie around the world?" You should "try to view the sales agent as a friend and ally. Take their advice. They know what people want to buy." According to Ian: "Some sales companies will give you sales estimates up front. These may or may not be accurate", but they are very important. "If your script is strong, the big sales companies will be interested, so you should aim high".

It's all about raising the money. Image: Wikipedia

How does Silver Reel Structure the deal?

Silver Reel is a lender; they will "lend the money" to make the film, although there is (of course) "a fee and interest to pay on the loan". They also "often take a small 5-10% equity stake" in the film. Generally, "it's good for the investors to have an upside if the film does well." In effect Silver Reel is "a lot like a bank". US Banks "may offer gap finance, but European banks do not". Why? Because "banks are very cautious, even Los Angeles banks" who know the business.  How big a gap can Silver Reel finance? "Up to 20% gap finance".

What are the Big Mistakes made by Producers?

The biggest mistake is "giving the Same pitch to different people". Why? Because you must "customise your pitch". Ask yourself "Who are you selling to?" You should also "keep it short". Do you need "twenty minutes to tell your story? No. Keep it to two minutes". Why? Because "sales agents aren't really interested in story; they want to know about the marketing hook". How can they sell the film? Who will want to go and see it?

How does the process work?

Ian "starts off pessimistic". He asks himself "what is the worst case scenario?" After all, "not many films get a US theatrical release - It probably won't happen" for most independent films. As a UK film-maker, you must "have your film pre-sold in UK". Why? because "foreign buyers won't buy your film if you can't sell it locally". You must have the confidence of your local market. Silver Reel "must have a worst-case scenario prepared and ready", else they will not invest. Your home market is "your number one market".

Pixar - making it tough for the competition

Do Silver Reel invest in animation?

Animation "is a greater risk" for Silver Reel, says Ian. Why? Because it "takes longer to make, and therefore costs more money" in interest payments on the loan. Also, "Pixar is so good - they have set a very high bar" for others to emulate.

What you need for Silver Reel to look at your project?

You should "not come to Silver Reel without a director, a script, and a sales agent attached". In other words, "come with as much in place as you can. Silver Reel provides production financing". In theory at least,  they "start to pay out on the first day of shoot." How long do they lend for? "The cycle is usually 18 months to get their money back, from the first day of shooting. If that does not happen, then something has gone wrong." This is where animation can be a problem, because it takes longer.  As Ian put it: "Investors like short cycles. They target a double digit return for investors". Silver Reel is a "relatively low risk fund - they want to protect capital". So, "out of 15 films they have invested in, they have lost money on only one." Who are their investors? The investors are "seriously wealthy people in Switzerland". These are experienced investors, and perhaps just "2-3% of their wealth maximum is invested in film". However, it is good business. "Film is doing well at present - better than hedge funds". What are Silver Reel, really? They are in effect "like a bank deal, but more expensive". However, they are "much less bureaucratic than a bank. Who makes the decisions at Silver Reel? - the three principals" who own the partnership.

You must have a completion bond

How does Silver Reel work in practice?

They start by estimating what the Tax Credit on the film is going to be worth.  To do this, they "need accountants to estimate what it is actually worth" in hard numbers. Silver Reel "will advance 80-90% of the value of this tax credit. They also advance cash on pre-sales". It is hard to get pre-sales, however [A pre-sale is where you pre-sell a territory - such as the UK - to a distributor. In other works they agree before the film gets made that they will buy it from you for a fixed price - Ed]. Pre-sales are still available, but "prices have come down", owing to the overall problems in the film industry.

Overall, "gap financing is expensive". It is "the most expensive bit" of the financing process. Sometimes, Silver Reel "will agree to take cash out of revenues rather than out of the budget, but then they charge much higher fees". This is known as "super gap" financing. Why is it so much more costly? Because it involves "much higher risk". .

Tax Credits: What are they?

"All of them [tax credits] are different. Most tax credits are actually rebates. Most will require you to make your film in that country. Then, you submit your audit and you get cash back from the Government body which offers the rebate." How does it work in the UK?  Here in Britain "you get 20% back from HMRC, though it is actually more like 15-18% in the end". When do you get the rebate? "You get this at the end, so therefore you need to find someone to lend you the cash in the meantime, and also take the risk that you will not qualify." What are tax credits for, and why do governments offer them? "The purpose of tax credits is to create a sustainable industry. Some regions such as Canada will give you a 35% rebate, and Australia will give you as much as 50%."

Completion Bond (or guarantor)

In addition, "a Completion Bond is a requirement"; the film must be bonded. [A completion bond is an insurance policy which guarantees that the film will be completed and delivered on time and on budget - Ed].  Not just any company either; note that "there are just three reputable completion bond companies out there". Why must the film be bonded? Because without a bond, "the risk is too great". What is a bond company? The completion bond company is a company "backed by insurance companies. They guarantee to complete the film". What does it all cost?" The answer is "2-3% of your budget". Why do some films not use a completion bond? Because "Producers don't like it", because it costs extra, and budgets are tight. But, "not many financiers will proceed without one". And, the "bigger the budget, the more financiers will insist on it." However, you can "treat them as a partner - they are there to help. They can look at your budget and see if it realistic or not".

Collection Agents
Collection Agent 

What is a Collection Agent? "A Collection Agent keeps everyone honest". But, it "must be a reputable one. They collect all the revenues". Who are they? "The big ones are Freeway and Fintage", the latter "based in Hungary, run by Dutchmen". What does it cost? The cost is "1% of all your revenues". You need to budget for this, though Ian says that it is "not usually in the budget". What is it for? It is really an "audit process - they are experts in revenues". When someone asks "Where has all the money gone? - They will know".

What about Co-Productions. Does Silver Reel like them?

Co-Productions "add complexity to the legal process. The trouble w co-pros is that there can be too much soft money." [Soft money is government grants, which generally do not have to be paid back  -Ed] Ian is "not sure if there is always a commercial potential" where government grants are involved. Rather, he "wants to see market validation". In other words, is there really a market for your film?

Here at Bucks we want our students to be film-makers as well as good technicians. Animation is not just about learning to move characters around and create a performance (though this is a vital part of it), it is also about telling stories, and learning the craft of film-making. We hope all our students will have a story they want to tell, a story that they will bring to the screen in one form or other. Great films are a marriage of great creativity and great business - only with the help of the latter can a great story come to the screen.


For more on the experience of studying at Bucks New University, come and visit us at one of our Open Days,  take a virtual tour of one of our animation studios, check out what our students think of our course, and see why we're ranked in the top 12 creative universities in the UK. Find out why we're giving free laptops to all our students, and why we give all our students free access to videos at Also, see what financial assistance might be available to you. Learn which is better for animation, a PC or a Mac? Get hold of a copy of a map so you can find your way around campus, and learn about motion capture at Bucks. And find out about how our online video tutorials work.

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