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PRE SALE FINANCING: A SOLUTION FOR INDEPENDENT FILM FINANCING
Oleh : Dedy Kurniadi
DEDY KURNIADI & CO, LawyersThe Reality of National Film Production
The awakening of national film industry from its long sleep needs to be supported and responded by various communities. Not only from those who are involved in the world of film but also from the whole society who is dreaming of the improvement of film in the country. There are numerous reasons why national film production could not draw level with other film production in other countries. In fact, to be honest without any means of exaggerating, there is a lot of youth in our country who has more potential creativity compared to other countries.
Then, what actually happens? Amongst various problems above, one which is easy to find and frequently becomes the film creator’s answer is money. Classical it is, but that is the reality. So, what is the solution? One of those is to use the banking service.
Film production is divided into two categories, major film studio and independent film production. The major film studio produces a large scale film and has a good financial ability, while the independent film production is the opposite. In Indonesia, most of those are still categorized as independent film production. (Lionel S. Sobel & Donald E. Biedermean: 2001, 242).
However, the film production financing could be considered as other entrepreneurships which also utilize banking credit facility. The obstacle is the fulfilment of collateral type or credit guarantee prerequisite. The independent film production finds a difficulty in providing the credit guarantee, whereas the film producing needs a large fund.
The difficulty of film industrial company in providing the credit guarantee is due to the large financing needed to produce a film. The production phase starts from the preparation, distribution and to film selling. Every phase of film production involves a number of sides.
This is where the government and banking commitment are required in order to improve the national film. It has to be realized that through film, national art and culture could be effectively brought up to international level. Even, film business could trigger the national economic growth. Let us mention a survey conducted by The International Intellectual Property Alliance in 1999 which describes the United States industrial copyright that gives extra contribution to national economics and employ more employments compared to any manufacture sector, (Lionel S. Sobel & Donald E Beiderman, 2001: 1).
Pre-sale Financing
In industrial film practice in United States, there are several film financing alternatives such as through loans, investor financing, distributor-supplied financing, and borrowing against pre-sales or a loan against distribution contracts, (Mark Litwak, 2003).
From the four film financings above, the fourth method could be the solution for film financing in Indonesia since the other three methods emphasize on the condition of guarantee when the credit is issued. Differs from the fourth method, the collateral of the credit is based on a distribution contract made after the film production is completed (pre-sales). By this means, the film producer has the freedom to create a good quality film which could be regarded as collateral for the credit settlement. This financing system is known as “Pre-sale Financing”.
The “Pre-sale Financing” method is started with a pre-sell contract with the third party. The contract is made when the film production has not yet been started and still in documents form containing scenario, budget, director and actor or actress’ contract, (Dov S-S Simens: 2003, 101). During the pre-sell contract, the producer does not receive cash money; he or she only receives collateral payment which will be obtained when handing over the result of film production.
Besides that, the pre sell contract could be performed by making a distribution contract. This contract entitles a right for the third party (distributor) to exploit the result of the film production in various media form.
Both contracts above, either the pre-sell contract or the distribution contract mentions the minimum guaranteed amount for the production. Both of these contracts as well as its complementary documents will be the collateral for the bank to issue the credit.
After the producer signs the “loan agreement” with the bank, the bank will issue a fund for the film production cost according to the planned schedule. At this time, the producer complements the document with promissory notes as the collateral for the credit. In addition, the producer also gives the assignment of proceeds obtained from the third party or distributor. As an addition to the collateral for the bank, the producers could give a security agreement or a copyright guarantee as a copyright mortgage. The purpose of the guarantee is to assure the bank’s priority right in regard to the producer’s bankruptcy.
Indonesian Banking Practice Utilizes Pre Sales Financing
Indonesian banking has not yet accustomed to practising the pre-sale financing method. One of the banking’s reasons is the possibility of high risk in returning the credit if the film produced does not have a proper value to the credit ratio. This matter could be seen in Indonesian Banking Act as follows:
“The credit given by the bank is full of risk so that in the implementation bank has to take a note of reasonable credit principles. To lessen the risk, the credit issuance collateral by means of a certainty in debtor’s capacity and capability to settle the credit in accordance with the agreement is the important factor that must be noticed by the bank…”.
However, basically the opportunity of using the pre-sale financing method is absolutely allowed by the Indonesian banking law. Certainly it could be performed by completing the standard of credit issuance such as paying attention to capacity, character, collateral and capital, (Hongkong Institute of Bankers, 191).
In regard to the risk problem, Lionel S Sobel also gives several opinions that there are three main risks which are needed to be calculated in pre-sales financing (Lionel S. Sobel & Donald E. Biedermean: 2001, 244), as follows:
a. performance risk; is a risk which appears since the film could not be punctually finished or not in the planned budget.
b. marketing risk; is a risk causing the incapability to fulfil the credit in accordance with the date mentioned in the contract along with the sufficient value since the film is not sold out. To overcome the problem, usually bank utilizes certain insurance services.
c. credit risk; is a risk in which the distributor is not able to perform the payment as arranged in the contract due to trade problems (such as, bankruptcy and liquidity) or political problem.
Therefore, the credit issuance for the independent film production through pre-sale financing could be conducted through bank’s assessment on pre-sale contract suitability or distribution contract between the producer and the third party as explained before.
The various collaterals conditioned in pre-sale financing are commonly accepted in banking practice in Indonesia. For example, the assignment of proceed is an instrument that could be guaranteed through fiduciary. Another term which is still unlikely to be performed in Indonesia is the copyright mortgage. This is due to the inexistence of a legal regulation managing consignment of fiduciary guarantee for a copyright or brand.
According to the explanation above, it can be concluded that for the time being Indonesian banking law is allowing the execution of pre-sale financing. As a result, this instrument is expected to encourage the development of national film industry, particularly the independent film production. Pre-sale financing is not yet popular in Indonesia but it can be one of the solutions for film productions to overcome capital problem. Besides, there is a probability to implement pre-sale financing scheme outside of banking scheme.
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