Debt financing occurs through a loan, which can be secured or unsecured. A secured loan is supported or backed by security or collateral. An unsecured loan has no particular property backing it. For example, credit card debt is unsecured while an auto loan is secured by a lien or interest in the vehicle.

The advantage of a loan, from a practical and legal point of view, is that the transaction can often be structured in a fairly simple and inexpensive manner. A short promissory note can be used, though more often, t. will be a promissory note, a loan agreement and possibly a security agreement.

Another advantage of debt financing is that the transaction is almost always not subject to the complex federal and state securities laws that govern many types of investments including equity investments in film. It is almost typically far less document intensive than equity financing.

One of the major differences between a loan and an investment has to do with risk.

With a loan, the entity that borrows the funds, the debtor, is obligated to repay the loan and whatever interest is charged, regardless of whether the film is financially successful or not.

The creditor earns interest but does not share in the upside potential, i.e., profits, of a successful film. Since the creditor is entitled to be repaid even if the film is a flop, the creditor does not share in the risks of the endeavor.

Of course, t. is still some considerable risk with a loan because loans are not always repaid, especially unsecured loans that don’t have any collateral backing them. Also, even a loan is secured by a security interest in the film and related intellectual property, such security may not be terribly meaningful if the film fails as the securing collateral may be ultimately worthless.

However, the risk is still far less than an equity investment w. the investors risk the entire loss of their investment if the film fails to recoup its financing.

Though potentially less complex than equity financing, it is still important that filmmakers consult an entertainment attorney experienced in this type of financing prior to offering or entering into any loans to finance their film project.


How to get financed