With the explosion in tax credits, new media incentives, broadcaster programming funds and government and cableco financing initiatives, Playback’s annual compilation of investment and finance sources lists the ever-widening national and provincial pools of money producers can dip into. But as an increasing number of producers flood the funding gate, alternative sources of raising cash are becoming more vital. Playback takes a look at new opportunites on the banking front – expanding initiatives from the established players and new kids on the block getting in on the film and tv game (see page 1). Gap financing is another growth area producers are checking out and Malcolm Silver, the president of a production financing firm, looks at some of the innovations (see page 35). Eager eyes are also being cast overseas and a special edition of Binchmarks looks at the how-to’s of tapping into u.k. benefits (see this page).

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Malcolm Silver is the president of Malcolm Silver & Co., a firm helping Canadian film and tv producers with production financing. Silver also publishes the newsletter Silver Screen.

You have jumped through all the hoops – put a distribution deal together, secured a broadcaster, presold a couple of territories, lined up government funding and brought on a coproducer. But you still come up 25% short of your production budget. You know Canadian banks will only provide interim financing against collateral in the total amount equal to 100% of your budget. So what do you do?

Producers in this situation have generally brought in an outside investor or another coproducer, used corporate funds to self-finance or begged their distributor for a larger advance.

Now a new option is available for well-established Canadian producers – gap financing, also known as deficit financing.

Gap financing is a form of financing carried out by specialty banks and finance houses: firms that truly know how the film and television industry works.

Gap financiers appreciate the real value of unsold territories and they understand the risks involved in collection. Based on their evaluation of the unsold territories, on a minimum and maximum basis, the financier conducts a risk evaluation.

In general, gap financiers are looking for future sales to provide cover for the loan amounting to at least twice the amount of the gap. The cost to the producer is a fee and possibly a small equity position, determined by the size of the gap and various other factors.

This form of gap financing is already a popular option south of the border and in the European Community. In order for gap financiers to protect their interest, they take a keen interest in the production’s development and production plans to be sure it sets the stage for a successful production.

Canadian gap financiers by no means wish to become involved in the day-to-day aspects of any production. Nor are they considered coproducers or executive producers even though they eventually concern themselves with the sales aspects of the property.

The size of production suited for gap financing usually has a budget of over $4 million and a suitable gap range would be between 20% to 30% of the total budget.

The size of the gap financing required affects the cost to the producer, but essentially, the level of the production budget is an important consideration. For example, a budget less than $4 million would result in an overly expensive fee for the producer.

A new twist

Now available in Canada is a new twist on gap financing; the advent of the insurance-based financing policy, which in effect acts as collateral for a lending institution, like a bank.

Basically the ‘policy’ promises to pay the bank any missing cash difference between the production loan amount and the actual money collected from licensing of the film or tv series. The banks can provide the final production financing feeling secure because the policy ensures that the loan will be repaid at a fixed future date, 24 to 30 months after delivery to the marketplace.

In light of the changes to Canada’s tax shelter policy, investors can no longer be guaranteed an exceptional return on an investment in the film and tv industry. As a result, investors are harder to come by.

This situation has left firms involved in the financing of film and tv productions looking for new avenues to provide producers with the necessary capital. A few Canadian firms have already expanded their financing arrangements to provide this type of deficit financing as a viable option for some producers.

The film and tv industry is looking strong going into the new millennium: more production companies are going public, existing industry stocks are gaining strength, record high audiences are being recorded and there is plenty of Canadian talent making its mark and even winning Oscars.

As the industry grows so is the demand for financial resources. Luckily, financiers are evolving to meet the demand. Gap financing is a promising new option.