Advance Rate

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Say a friend owes you 100 dollars, which they promise to pay you back in exactly one month. You need cash sooner than that, so you ask an older sibling to lend you money right now, using that promise as your proof that the money is really coming. Your sibling agrees, but only hands over 80 dollars, not the full 100, just in case your friend is late or never pays at all. That 80 percent is the advance rate.

In the movie business, filmmakers often collect promises like that before a single scene is shot. A foreign distributor might sign a contract promising to pay a set amount, called a Minimum Guarantee, once the finished film is delivered to them. That promise is valuable, but it is not cash yet, and movies need actual cash to pay for filming right now. So producers borrow against it: a bank looks at the Minimum Guarantee and agrees to lend a percentage of its value today. That percentage is the advance rate, and it decides the maximum loan amount the bank is willing to hand over.

Why not lend the full amount?

Lending the whole promised amount would be risky for the bank. The movie might end up costing more than expected, the distributor might run into money trouble of their own, or the finished film might not meet the exact terms of the contract. By only advancing a percentage instead of the full value, the bank protects itself with a cushion in case something goes wrong.

What changes the rate

Banks do not use the same advance rate for every deal. A well known, financially solid distributor in a reliable country might earn an advance rate of 80 or 90 percent, while a smaller or less proven distributor, or one in a country where collecting money is harder, might only support an advance rate of 50 percent or less. Many of these Minimum Guarantee deals are negotiated at film markets like the American Film Market, where a movie's distribution rights are sold country by country.

Fun facts

• A movie can be financed almost entirely before it is even shot, just by pre-selling distribution rights around the world and then borrowing the advance-rated cash against those promises.
• A single big movie star attached to a film can raise the Minimum Guarantees distributors are willing to offer, which in turn raises how much money can be borrowed against them.
• If a distributor backs out or cannot pay, the bank is left relying on whatever Collateral was agreed to in the loan, which is one more reason advance rates are never a full 100 percent.