Use Caution with Personal Debt Financing

Jon M. Garon
Published on : 2009-08-05

This is part of a series of book excerpts from Independent Filmmaking, The Law & Business Guide for Financing, Shooting & Distributing Independent & Digital Films designed as an introduction to the many legal issues involved in the filmmaking process.

The simplest form of self-financing is for the filmmaker to take cash from his savings account and transfer it to his business account. While this certainly works, few filmmakers have sufficient savings accounts to use this system. In addition to personal cash, filmmakers can seek nonprofit grants, personal loans, and other avenues to help complete film projects.

When self-financing without cash-in-hand, the filmmaker often turns to available sources of debt financing. Personal credit cards and personal collateral often serve as the source of emergency money that filmmakers want to utilize. These sources are generally expensive because they have high interest rates. They are also highly risky because the debt is due whether or not the film is completed.

For the true guerrilla film, pre-sell arrangements and studio financing — with its attendant studio control — will simply not work. A guerrilla film is not fully conceived until finished. If the guerrilla filmmaker is well financed, the spontaneity and hunger that should inform the work quickly turns into bloated excess. Many second pictures suffer from the sudden affluence of full financing. The guerrilla filmmaker tempers the urge to explore “what if” with the painfully limited resources available. When the resources become plentiful, the line between creativity and self-indulgence blurs. A disciplined independent or guerrilla filmmaker can transition into a studio director, but only by substituting other restraining forces for the financial restraints of the independent filmmaker. Whether those restraints are scheduling, financing (again), or artistic vision, something must serve to challenge the filmmaker, forcing him to make only the best choices for the story rather than exploring the limitless possibilities that the question “what if” can bring.

As a guerrilla filmmaker, the primary source of personal financing comes from discretionary income and loans. A guerrilla filmmaker who can finance his film exclusively from discretionary income – savings that will not be missed — needs little advice regarding the financing of the film. Tell your story, make your movie, and suck as much of the marrow from the production’s bones as you can.

Most guerrilla filmmakers, however, do not have the luxury of sufficient discretionary income. Instead, the financing comes from the ability to obtain personal loans on credit cards or through home equity lines of credit. In home equity lending, the filmmaker borrows money from the bank by securing his primary residence as collateral. Historically, a bank would only lend to someone who maintained at least 20% equity in the property. In today’s competitive lending market, banks often lend even if the homeowner has little or no equity in the property.

If married, the filmmaker will typically be a co-owner of the property with his wife. The bank will require that all parties who own the property sign the loans. This makes both the filmmaker and the non-filmmaking spouse personally responsible for the loan. In most states, the loan must be repaid even if the house is worth less than the value of the loan.1 The danger of borrowing against one’s home is that the risk of the film not selling jeopardizes the house of the filmmaker. This is a significant burden for the filmmaker to impose on the non-filmmaking spouse, particularly when added to the time commitment and personal sacrifice that guerrilla filmmaker’s work extracts from his family.

The filmmaker should carefully consider the expenses for the interest and principal payments required. If the only way the filmmaker can cover the payments from the loan is to successfully sell the film, then the filmmaker should restructure the budget or take other steps to avoid this risk. I have never given different advice to any student or client. Change the budget, change the project, or find another way to tell the story. I have never heard of anyone who has gambled his house on a film and won. If the filmmaker can cover the interest and principal payments, then using his home as collateral is merely an unwise, highly risky choice that should be avoided if practical.

The other personal source of funds for financing the film is revolving credit — credit card debt. Because of the questionable lending practices, a moderately successful individual with a reasonable amount of personal debt will be offered tens and even hundreds of thousands of dollars of credit cards. Credit cards are unsecured and generally offered for personal use rather than for commercial use. The cards are generally in the filmmaker’s name rather than in the name of the film company. The filmmaker should carefully consider the consequences before committing his personal assets by financing the film through the short-term, high interest loans available from credit card offers. While the attraction is obvious, and filmmakers such as Spike Lee built their early success on credit cards, the downside can be financial ruin.

If used at all, credit cards should be left for last. Having a credit card available can serve as a rainy-day fund to cover the final costs of editing when the investments and production expenses go slightly over budget. They should also be paid off first to avoid the high costs of the loans.

Finally, some guerrilla filmmakers convince the cast and crew to “loan” the production their credit cards. The practice is unethical and should not be used. No matter how tempting this offer, the filmmaker should avoid this last temptation. The named party on the card is the person responsible for the debt. Even a promise — or written agreement — by the filmmaker to cover the costs on the card will have no effect against the bank issuing the card. Since the use of a crewmember’s credit card would not be done unless the production had no assets, the effect is to make the other participants in the film financially obligated for the debts of the production. If members of the cast or crew have the financial ability to become investors, then they should be properly informed and rewarded as investors. The so-called borrowing of their credit cards provides these crewmembers no protection while exposing them to significant financial risk.

* Jon Garon is admitted in New Hampshire, California and Minnesota.


1. Contrast this with a home money purchase mortgage which may be non-recourse against the buyer’s of the property in some states. If the loan was a second mortgage or line of credit, anti-deficiency laws will not apply.