The first thing to remember when you start investigating how tax credits work is that every state has set them up differently. In some states, the credit can be sold at a discount, transferred, or as in the case of NY State, refundable. It has long been a difficult concept for banks to figure out how to lend against a refundable tax credit because the proceeds cannot be “assigned” as collateral.

Several third party lenders, funded by equity investors, have predicated an entire business on accepting this risk over the last few years, and now, finally, some banks have come on board as well.

Producers should consult with their attorneys and accountants on their business structure, but the majority of the time, most producers form an LLC for their productions. Because of the legal make up of an LLC, the refund would flow to it’s individual members, rather than the business. A lender will most always want the funds to flow to a business entity. If you want to borrow against the NYS tax credit, you also need to form a corporation which will be the borrowing entity to receive the tax credit proceeds. This corporation can be owned by the LLC, but should not serve any purpose other than to receive the tax refund.

If a bank is the lender, they will typically want a performance bond on the production. This normally makes sense for films with budgets of $3MM or more. Again, third party lenders will more often take the risk of lending to smaller budget films without a bond (at a premium).

Lenders will not loan 100% of your films proposed tax credit. They will make a decision based on risk (the experience of the producer, production accountant, line producer, talent involved, etc..), and can lend anywhere between 70-87%. Some of that will also include a cushion in the event that the final approval from the State comes in less than the original application had indicated. In addition to the spread, there will also be legal and consulting fees.

At a time when filmmakers want to see every dime they have for their project up on the screen, this is a great opportunity to have some additional cash for your project.  In the event that you have one equity investor footing the bill for all or most of your production (isn’t that what everyone is looking for?), you may also want to ask them if they want to finance this piece themselves.