Pet Peeve #309: ‘Debt Finance’ and ‘Investment’ Are Not Interchangeable.
What is the difference between debt finance and an investment in film?
On the pet peeve list, it goes something like this:
Herald Square (it’s crowded and no one is ever actually moving).
Having to reset a password and then not being able to set the password I want because it’s too similar to my earlier passwords, which means I will just forget it the next time I go to login kicking off an incredibly painful cycle of hell.
Grainy watermelon.
…..
309. ‘Debt finance’ and ‘investment’ are often used interchangeably, and they shouldn’t be.
‘Investment’ will sometimes be used to refer to all moneys coming into a production from investors and debt financiers or worse, ‘investment’ might be used to blanket cover all moneys coming into a production. This really isn’t accurate - debt finance and investment are two very different types of finance with distinct customary deal terms. In the course of pitching, negotiating, musing, over the financial set up of your production, these two types of finance shouldn’t be lumped together because to do so can create mess and confusion down the line. In order to understand why they shouldn’t be lumped together, let’s look at the similarities and differences between debt financing and investment.
Similarities
The end result is money in your bank account.
- The end. -
Differences
Take your jacket off and pull up a chair.
1. Repayment vs. Recoupment
Debt finance must be repaid. In debt financing, a lender loans the producer of a project an amount of money, which the producer is required to pay back to the lender along with any other financing fees within an agreed timeframe (i.e. referred to as the maturity date or repayment date).
Meanwhile, investors will have the right to recoup their investment, but whether or not they recoup, will be dependent on how much revenue the project actually generates. If the project doesn’t make any money, an investor won’t recoup their investment, but a debt financier must be repaid irrespective of the commercial success of the project.
2. Interest vs. Premium
Debt finance will bring with it an interest rate on the loan amount. This is one way in which debt financiers make their money. The interest can be simple or compound interest, and it can be locked at drawdown or not. It’s entirely up to the lender and what they decide their borrowing terms are. The interest on the loan will be added to the loan amount and form the outstanding amounts that must be repaid.
By contrast, an investor will have the right to a return on investment by way of a premium i.e. a right to recoup their investment plus an additional percentage of their investment. Like the recoupment of the investment amount, the premium is only received if the project makes enough money to pay that premium.
3. Profit Participation
A traditional debt financier should not be entitled to profit participation, a share in receipts, or a copyright interest in the project. On the flipside, investors will usually be entitled to an additional return on investment by way of profit participation.
Why? Keep reading.
4. Risk
Because debt finance is always expected to be repaid and is more secure (see point 5 below), debt finance is generally lower risk than investment finance. And because investors are the ones taking on the risk, and acknowledging that they may never see any returns, they’re entitled to share in the success of the project if it does go into profit.
5. Security
If a debt financier is asking for security, this refers to a security interest which is generally taken over the project or the property of the producer to secure the performance of an obligation (e.g. the requirement of the producer to repay a lender the loaned amount plus interest and other financing fees under a loan agreement). Customarily, once the loan is repaid in full, the security interest would be discharged. Security is there to minimize the financing risk for debt financiers.
The easiest way to digest this is to think of this in the context of mortgages, which are a type of security interest. When a bank loans you money to buy a house, you’re usually granting them a security interest in the house (i.e. a mortgage). If you default on your mortgage repayment, they are entitled to seize the house and sell it in order to settle the debt. Likewise, if a debt financier is taking a security interest over the film’s assets, or the company’s assets, for example, it’s giving them the ability to sell the secured assets in order to repay themselves.
With investment, security shouldn’t even come up in conversation and if it does, it’s entirely inappropriate.
OK, onto pet peeve #310 - ads timed right in the middle of a scene as opposed to at the end of one.
Disclaimer: This post should not be construed as legal or commercial advice and we recommend that you obtain independent advice before entering into any financing documents. Please note that this is not an exhaustive list and is a general overview of the differences between debt financing and investment finance. E/S Collab. makes no warranty or representation that this information is exhaustive, complete or accurate.