Since most distribution agreements do not immediately result in up-front cash to the filmmaker to pay for the costs of principal photography and post-production, the production company must use the distribution agreement as collateral to borrow money from a traditional bank, film finance company, an investment fund or other lender. The distributor will execute a guarantee agreement which provides that distributor serves as guarantor of the loan.
Since the lender is entitled to repayment regardless of the film’s revenue or success, the distributor’s guarantee of the loan puts the lender in a position of much greater security than if the filmmaker is solely responsible for the loan. When the completed film is delivered to the distributor, the distributor will pay-off the loan (directly to the lender).
In order for a pre-sale agreement to be an acceptable collateral, the distributor must be “bankable”, that is, it has a good reputation or creditworthiness. Obviously, that won’t be as important if the distributor is willing to make a sizeable cash advance upfront, making it unnecessary for a producer to seek a loan using the pre-sale agreement as collateral.
Typically, banks will lend up to 80% of the face value of the minimum guarantee being used as collateral. The actual amount of the loan, and any conditions attached, will depend on the distributor’s risk profile. Each minimum guarantee is individually discounted based on the perceived risks to the bank, such as the distributor’s reputation and the bank’s history with the specific distributor and territory.
That is why, prior to deciding whether to presell a film to a distributor, the producer or sales agent must gain knowledge of the distributor in each territory, their payment history and reputation in the market. The greater the reputation a distributor has, the more valuable will be its minimum guarantee to a lender, and the collateral will be discounted less.
As a prerequisite for a loan, a bank will require the production company or distributor to obtain a completion bond (“completion guarantee”) from a reputable bond company, to ensure that the project is completed on time, on budget and delivered to the distributor in accordance with the terms of the pre-sale agreement.
In addition to the completion guarantee, the bank may require that the production company provide certificates of insurance coverage, including general liability and errors and omissions (E&O) insurance, naming the bank as an additional insured, since, in the event of a litigation, the bank may be named as a defendant.