A producer with a good reputation and a strong project with elements such as a lead cast and a director attached can sometimes "pre-sell" the distribution rights in a film to a distributor before production commences. While a deposit is often payable by the distributor most of the value of the sale is payable on delivery, so a producer requiring funds must finance the value of the sale until delivery. This is usually done with a loan from a specialist media lender secured against the benefit of the distribution contract.
Once the producer approaches a bank the value of the distribution contract will be discounted to allow for costs such as interest charges, legal and financing fees and taxes. Depending on the reputation of the distributor the distribution contract may also be discounted for the risk of non-payment, something that can be mitigated by getting a letter of credit from the distributor. Piecing together several pre-sales can make a substantial contribution to the financing of a film.
An important element of financing the presale will be a completion bond. As the bank depends on complete delivery of the film to trigger full payment by the distributor the producer is required to arrange for a special form of insurance which guarantees completion. Such a bond would cover additional costs where a film goes over budget or schedule or in the case of abandonment repay the outstanding loan to the bank.
A sales agent often takes a leading role in gaining pre-sales and concluding the many agreements and notices required before a bank loan can be drawn down. Where the sales agent has a good reputation its estimates of future sales for unsold countries can often be borrowed against in a similar manner to discounted distribution contracts, although the estimates are likely to be heavily discounted.
In addition to the difficulty of pre-selling low budget films, the legal, financing and completion bond costs associated with setting up bank finance at this level may reduce the effectiveness of the pre-sale. A low budget production with a relatively small pre-sale may however be able to use the principle behind discounted pre-sales to attract finance from other sources instead of a media bank such as sourcing funds from an investor who will get the eventual proceeds of the pre-sale. Alternative sources of loans may also apply such as the Loan Guarantee Scheme or use of small business development funds. Low budget productions are more likely to get a pre-sale during post-production with at least a rough edit of the film available, and a distributor may be willing to pay an advance up front to cover completion costs.
Information provided by Netribution