Why the gap exists
Most indie finance plans come together in pieces. On THE LONG DRIVE, the producer has $700,000 of equity, $450,000 from pre-sales, $350,000 from a tax credit loan, and $200,000 of deferred fees. That's $1,700,000 against a $2,000,000 budget. The last $300,000 either comes from more equity, which is expensive to raise, or from a gap loan against the territories that haven't sold.
How a lender sizes the loan
The sales agent produces estimates for each unsold territory, usually a high (ask) and low (take) figure. The lender focuses on the low figures. The multiple used below is an assumption for this example. Each lender sets its own.
| Unsold territory | Ask | Take (low) |
|---|---|---|
| France | $220,000 | $150,000 |
| UK | $300,000 | $200,000 |
| Scandinavia | $120,000 | $80,000 |
| Latin America | $150,000 | $90,000 |
| Rest of world, combined | $250,000 | $130,000 |
| Total | $1,040,000 | $650,000 |
If the lender requires the low estimates to cover the loan at least twice, the maximum gap is $650,000 / 2 = $325,000. The producer asks for $300,000, which fits.
The loan's cost has several parts: interest for the time until sales repay it, an arrangement fee, and the lender's legal costs. If those total $45,000 in this example, the gap lender needs $345,000 from the collection account before equity starts recouping, as shown in the waterfall.
Conditions lenders set
A gap lender usually lends alongside a senior lender on the pre-sales and tax credit and wants the same protections: a completion bond from a completion guarantor, a sales agent it considers credible, an interparty agreement setting who gets paid first, and all other financing closed. Equity has to be in the bank before the gap funds.
Where producers misjudge it
Treating estimates as money is the main error. Estimates are the sales agent's opinion at a point in time, and they drop if cast changes or the finished film disappoints. When sales come in at the take figures, the gap loan gets repaid but equity recoups slowly, because the lender is paid first.
The other mistake is underestimating time. Interest runs until the territories actually sell and pay, which may be two or three years after the loan funds. Model the interest in the P&L projection using a slow sales case, and make sure the equity financing documents disclose that a gap lender sits ahead of investors.