Indie Film Breaks Ground With SBA-Backed Financing

The movie is a comedy that challenges racial stereotypes. But “The Gristle” could shatter another stereotype long held by the film industry and bankers alike: that government-backed loans aren’t available to this town’s numerous production companies.

The Los Angeles district office of the Small Business Administration has backed a bank loan to “Gristle” producers Mychal Wilson and Eugene “Geno” Taylor, giving the independent filmmakers a chance to finish their project with the creative freedom that studio backing often stifles.

Remarkably, it is the first such loan ever. An obscure federal law dating to the 1930s long prohibited SBA-backed loans to “opinion molders” such as newspapers, radio stations and even greeting card companies. The law was quietly lifted in 1994. But few if any production companies have sought such financing, and SBA lenders have largely steered clear of the deals.

The reasons are numerous: The product is intangible. Revenues don’t flow until the picture is made and sold. Collateral is often problematic for young filmmakers, many of whom live on a shoestring and ply their trade with rented equipment. And the terms of the loans--often one or two years--are undesirable to many banks, which get better returns on longer-term deals.

But the “Gristle” deal could herald a change. In treating themselves like a small business just as worthy of an SBA loan as a restaurant or shoe store, Wilson and Taylor have broken a mold.

To them, the fresh approach could teach young filmmakers more responsible business skills, and free up creative talent, like “Gristle” writer-director David Portlock, to pursue edgier projects on their own instead of handing off power to the first willing studio.

End of Blackout for Film Producers

“Hopefully, the quality of independent filmmaking will improve, because you have to be accountable,” Portlock said. “Here, the creative team and the monetary team are linked. . . . You have to sell this thing or you are liable.”

To the SBA, it marks the end of a financing blackout--albeit unintentional--for film production and sends a message to lenders that film deals can pencil out. The SBA just guarantees the loans, but banks must agree to make them.

“We hope to really get the word out to aspiring and existing filmmakers as well as our lending partners that this is an industry that we ought to look at,” district director Alberto Alvarado said. “We’re at the gateway of the film industry here so we really ought to be at the vanguard of leading in this industry.”

The deal was finalized last month, just weeks after congressional leaders held hearings in Burbank on the issue of runaway film production to Canada and elsewhere. Among the recommendations: more SBA financing for local film production. Alvarado said the deal was coincidental to the lawmakers’ push.

The SBA has been willing to make such deals since the opinion molders rule was lifted nearly six years ago, but no one came knocking, he said. However, the agency has made loans to small businesses that serve the industry, such as costume designers and caterers.

Alvarado said he hopes to craft workshops to teach SBA lenders about film production deals, specialized transactions that “present challenges that your typical widget maker” doesn’t. Already, he said, he has noted increased interest among lenders to finance film production, although those banks’ SBA divisions have largely shied away.

For the “Gristle” team, the path to financing has been an odyssey. Taylor and Wilson had financed Portlock’s short film “The Spartans,” which debuted at the Sundance Film Festival in 1996 and featured Wilson, Taylor and Danish-born Carsten Norgaard.

How Story Behind ‘Gristle’ Came About

After Sundance, Portlock wrote “The 4,” a feature-length film that built on the Spartans theme--a fable of fate, God and Satan that struck out with studios’ independent film divisions.

Portlock is African American, as are Wilson and Taylor. To Portlock’s dismay, he watched other black filmmakers from Sundance 1996 get snapped up by studios.

“Every single project was hip-hop-related or growing up in the hood-related,” he said. “I thought, ‘Just because we don’t want to deal with that subject matter doesn’t mean that we’re not black.’ ”

Smoking on the balcony of the House of Blues during a 1998 concert, the three men groused about the treatment Portlock was receiving. And Taylor made an offer: “Write something for [a lower] budget range and let’s put something together ourselves.”

So was born “The Gristle,” a tale of eight con men of different ethnicities who coincidentally come together in one location and are forced to deal with their apparent differences. Portlock wants the film, a humorous look at racial labeling, to appeal to all audiences, not the narrow demographic that he felt studios were pushing.

Wilson, Taylor and Norgaard (“Mighty Ducks II”) will star, with Norgaard co-producing. The cast also includes Orson Bean (“Being John Malkovich”) and “Star Trek’s” Michael Dorn.

Taylor is a small-business owner, whose Sun Beauty Supply is in Inglewood and the Crenshaw district. He also owns several pieces of property, one of which serves as collateral for the loan. Wilson, a territory business manager for pharmaceutical giant Bristol-Meyers Squibb Co., had a friend in the restaurant business who led him to the SBA’s Alvarado.

Alvarado sent them to Charo Community Development Corp., where business consultant Angel Chang helped them put together a loan package to pre-qualify for an SBA loan.

But even with a pre-qualification letter in hand, finding a bank to do the deal wasn’t easy. Nearly a dozen lenders turned them down. Some believed the deals were still prohibited by law, others turned up their noses at the amount and others showed interest but so little knowledge of the film industry that they were incapable of structuring a timely deal, Wilson said.

Eventually, Chang referred them to Moreno Valley-based Valley Bank, where he now works. About $70 million of the $91-million bank’s loans are SBA-backed, senior vice president Mark Nugent said. Valley Bank is not looking for a niche in the film industry but is flexible in its pursuit of borrowers, Nugent said.

“This deal had the characteristics that were essential to us: credit, character and capacity,” he said.

Taylor and Wilson declined to release the amount of the loan, for fear that it could bias distributors when it comes time to shop the film around. But the bank loan covers 75% of the film’s budget, with Wilson and Taylor making up the rest. It is believed to fall in the low- to mid-six-figure range.

Impact on Low-Budget Film Production

To the “Gristle” team, the opportunity for independent producers to finance their deals through bank debt could have a lasting impact on the industry.

The way Norgaard sees it, bank financing would encourage more low-budget filmmaking. That, in turn, could foster a genre of artistic simplicity, much as the Danish movement Dogma 95 did with the successful films “The Celebration” and “Mifune.” Those films were shot with hand-held cameras, ambient sound and lighting, and an absence of introduced props.

Wilson and Taylor plan to start a consulting company to help other film producers get bank financing, and launch a Web site with basic tips and contacts.

“With everything going digital, cost is dropping,” Wilson said. “You can see film moving into the budget of the SBA.”

Added Taylor: “I feel like I owe it to other filmmakers to make the path a little easier for them.”

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Financing for Films

The SBA will guarantee up to 70%, or $750,000, of bank loans to existing companies as well as to start-ups that meet certain criteria. Film production deals will be reviewed on a case-by-case basis. But proposals should generally address the following:

* Credibility in the industry, based on prior projects, awards or other factors.

* Proposed distribution network for the project, based on letters of intent, industry contacts, etc.

* Projected cash flow for loan repayment, and how cash flow is linked to the proposed distribution network.

* Projected market for the film and track record in that genre.

* How this particular venture or film fits into the applicant’s overall business plan.

* Available collateral. The SBA wants repayment to come from business earnings, but if any of the above factors is weak, collateral becomes increasingly important.

Source: SBA district director Alberto Alvarado.