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What is Gap Financing?

written by: Shane Burley•edited by: Rhonda Callow•updated: 7/1/2011

Learn about gap financing, a way of filling gaps between licensing fees and loan potential.

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    Product

    Film itself acts as a piece of equitable property in the eyes of many people who may be involved in investment or distribution. It has the ability to be a product for sale, yet its success is undetermined. There is really no concrete way to really estimate its value until it is released, so you have to get financing for it under the pre-condition that the film is likely to be successful. One of the main ways you can do this is to ensure that it has equitable market distribution. This is where gap financing takes place, which is a situation when the remainder of a film’s budget is procured through a loan acquired against possible foreign areas of distribution. In many cases these happen to be unsold areas that you are intending to sell to, but as a low budget filmmaker you may have better luck actually finding a foreign distributor ahead of time.

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    Process

    The main focus of this process is in acquiring licensing fees from that company. These license fees are paid to you for the right to distribute the film in a certain region, and then you use that money as part of the budget instead of a profit generating function once you have finished the film. The process happens when you negotiate with a bank or lending institution to give you that money ahead of time against either the explicit or suggested possibility of getting that money upon finishing the film. Few foreign distributors will pay license fees before a film is finished so the bank simply loans them to you ahead of time. Once you have finished the licensing fees are then paid to the financial institution that gave you the loan instead of paying you directly. Where this becomes “gap” financing specifically is when the lender gives you more money than the supposed licensing fees. Once the film is made you are then supposed to sell off licensing fees to another location, hence being able to pay back the gap between the foreign licensing fees and the amount you acquired from the bank.

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    Using It

    This is a process that is usually used in larger independent film, but as long as you are going to go into major financing acquisition this is a good place to look. Unfortunately it may limit the total profits you end up with afterward but it will help to get the final product complete.