How a pre-sale turns into production cash
The sales agent takes the package (script, director, cast attachments, budget, and a one-sheet) to a film market and meets buyers. A buyer in Germany agrees to license THE LONG DRIVE for German-speaking territories for 15 years, with a minimum guarantee of $300,000. A Japanese buyer agrees to $200,000. Both sign contracts with the payment due mostly on delivery.
The producer can't spend a contract, so the bank lends against it. Lenders discount the face value to cover interest, fees, and the risk that a buyer defaults. The numbers below are assumptions for this example.
| Item | Germany | Japan | Total |
|---|---|---|---|
| Minimum guarantee | $300,000 | $200,000 | $500,000 |
| Deposit paid on signing (10%) | $30,000 | $20,000 | $50,000 |
| Balance due on delivery | $270,000 | $180,000 | $450,000 |
| Bank advance against balance (about 89%) | $240,000 | $160,000 | $400,000 |
| Deposits plus loan available for production | $270,000 | $180,000 | $450,000 |
When the film is delivered, the two distributors pay the $450,000 balance to the collection account or directly to the bank, which uses it to repay the $400,000 loan and $50,000 of interest and fees. If those territories later earn more than the MG plus the distributors' fees and expenses, the producer receives overages under the distribution contracts.
What the bank requires
Lenders want to know the film will be finished and delivered, because a distributor won't pay for a film that doesn't exist. Expect the bank to require a completion bond from a completion guarantor, the rest of the budget in place (equity, incentives, gap), and a notice of assignment signed by each distributor confirming they'll pay the bank.
Where producers get tripped up
Delivery is the usual problem. Every pre-sale contract has a delivery schedule, and the MG isn't due until the distributor accepts delivery. Missing items, from M&E tracks to the E&O certificate to cast approvals on key art, delay payment while interest keeps running. Price out the deliverables at the budget stage.
Cast approvals are the other. Pre-sale prices usually depend on the cast named in the contract. If an actor falls out, the buyer may be able to reduce the MG or walk away, which pulls the rug out from under the loan. Keep cast deals and pre-sale contracts in step, and read more on the mechanics in pre-sales and minimum guarantees. Unsold territories left over after pre-sales are what a gap lender looks at next.