Financing A Craft Brewery
(NOTE: The upcoming blog post was written from a general point of view so as not to run afoul of applicable securities laws. This post does not constitute an offer to sell or a solicitation of an offer to buy securities.)
Financing a craft brewery can be a challenging task. While there are multiple options available, owners of new craft breweries typically finance the business by issuing debt or selling an equity stake. Below is a closer look at the most commonly used methods for financing a new craft brewery, listed from least common to most common.
A very, very small number of brewery owners have sufficient personal wealth to finance a new craft brewery without seeking any outside funding. It does happen, though! I won’t waste any more time discussing this option because, let’s be honest, it seems much less exciting than having to fight for every penny!
Crowdfunding has become increasingly popular since becoming a widely accepted fundraising method at the tail end of the 2000s. Most brewery crowdfunding campaigns run through companies like Kickstarter are aimed at raising less than $100,000, which is an insufficient amount of capital for every project outside of a nanobrewery. The capital raised from such campaigns is often secondary to the marketing boost and lifelong loyalty created when a consumer feels “ownership” of a particular business.
Breweries have multiple avenues to pursue in the search for debt financing. The most traditional method is pitching a business plan and pro forma financial statements to local, regional, and national banks. Lending standards and underwriting have become very strict since the economic crash of the late 2000’s, which often means that startup craft breweries with no previous business experience have a very challenging time receiving traditional bank debt financing.
The Small Business Administration (SBA) provides additional options. Two programs, 7(a) and CDC/504, are of particular interest for small craft breweries. The 7(a) program simply guarantees loans made by lending institutions. The loans are limited in maturity (25 years for real estate, 10 years for equipment and working capital) and size (maximum $3.75 million), but definitely provide sufficient capital to open a brewery. The rates are also subject to SBA-determined maximum interest rates. For the CDC/504 program, a bank partner will provide 50% of the loan at interest rates that can be above the aforementioned SBA maximums. A Community Development Center (CDC) will guarantee another 40% of the loan (generally at excellent interest rates). The remaining 10% is borrower equity and is funded by the business owner. The loans issued by both programs require collateral, which can be equipment ordered for the brewery, the brewery real estate and facility (if owned), or personal assets.
Regarding equipment, asset leasing companies have recently created finance arms that offer craft breweries the option to finance equipment purchases (brewing systems, fermenting vessels, chillers, boilers, etc.). There are many of these companies in business, including Brewery Finance and Brewery Equipment Leasing. Underwriting is sometimes less strict when working with these asset financing companies, but the total loan amounts are typically small and the interest rates are steep when compared to market rates. Loans don’t have to come from businesses, though – family and friends can be another source of debt financing. The terms of such financing vary from deal to deal depending on who is taking on the debt and that lender’s objective. For example, family members might only be looking to receive their principal in return while professional investors may be looking for a guaranteed dividend and a high interest rate.
A debt investment in a craft brewery is typically a term loan; at some point, the investors who financed the debt are no longer involved and the founders of the business own 100% of the company. Equity fundraising provides investors with downside risk that is similar to that of a debt investment (i.e. the business goes bankrupt and never returns any capital or interest), but also provides the ability for investors to share in the upside potential of the business. Depending on the terms of the offering, equity investors can even receive guaranteed dividends and the first right to any capital returned through a bankruptcy filing or liquidation.
There are multiple sources of equity capital. Venture Capital (VC) firms are certainly an option, although they are often focused on high-growth sectors like biotechnology and software. Receiving an equity investment from a VC often requires extremely investor-friendly terms, including multiple Board seats and, potentially, a degree of control over the everyday operation of the business.
High net worth individuals are another source of capital. These investors are often interested in a project for personal reasons (a “vanity” investment) and don’t have the time or energy to demand oversight of day-to-day operations. They are typically savvy, though, and as a result will drive a hard bargain when the terms of the deal are debated. In the past, finding individuals with enough net worth to consider such an investment was very challenging. However, the passage of the JOBS Act in 2012 has resulted in significant changes to the rules and regulations associated with unregistered securities offerings. Previously, the SEC prohibited businesses from advertising their private placement. This meant that the only way to reach these investors was through personal connections. With the implementation of Title II of the JOBS Act in 2013, solicitation is no longer prohibited for certain types of offerings. As a result, equity crowdfunding, wherein businesses post all applicable documents to portals that can be accessed by pre-screened investors (to ensure accreditation), has seen exponential growth over the last year.
As with debt financing, family and friends are also potential sources of equity investments. Compared to working with a VC or high net worth individual, the terms of the deal might not be as investor-friendly and will allow founders to retain a higher percentage of ownership and independent management of the business.
All of these methods have benefits and drawbacks. Crowdfunding is useful for marketing and can produce a small amount of cash for relatively little return, but it usually cannot be used to fund an entire brewery. High interest rates and principal repayments associated with debt financing can handcuff breweries in terms of cash flow and reinvesting profit into the business, but SBA loans for craft breweries are plentiful at the moment and can typically be accessed more quickly than equity investments. Another downside of equity financing is that there are other (non-founding) owners of the business, as well as enormous legal and accounting complexities associated with private placement offerings. However, equity investors can become trusted advisors and will often be ready and willing to contribute once a second round of fundraising is required. The important thing to remember is that success in any (or some, or all) of these methods will make it possible to open a brewery!