Whether your brewery is in start-up mode or is well established and producing award-winning ales, pilsners or lagers, chances are at some point your business will need financing. Below are seven sources for funding your brewery's growth and expansion.
1. Commercial Lenders
Commercial lenders come in many different shapes and sizes. They range from commercial banks and mutual fund companies to private lending institutions and other financial groups. Commercial lenders typically offer loans that are backed by hard collateral such as real estate.
The benefit from borrowing from a commercial lender is that the lender will not tell you how to run or manage your business. More importantly, the lender will not be entitled to any future profits your business makes. Your business' sole requirement is to pay back the loan according to the terms of your agreement.
The disadvantage of using a commercial loan to finance your brewery is that your business may be committed to large monthly cash payments and your business may lose valuable assets if it is unable to meet the lender's repayment requirements. This could impact your land, brewing equipment or any other assets used as collateral.
2. Government Grants or Loans
Applying for government assistance via a grant or loan is becoming an increasingly popular way for businesses to finance projects.
There are significant benefits to using government loans compared to other forms of financing. Typically speaking, the repayment terms and period are much less aggressive than those outlined by commercial lenders and can often include fixed and subsidized interest rates, no credit history checks, deferred payments, flexible income-based repayment plans, no pre-payment penalties and partial loan forgiveness.
However, there are drawbacks to government funding. With a high demand for financing, the application process is hyper-competitive, resulting in a demanding selection process. Applications can also be quite taxing, requiring mountains of time-consuming paperwork and proof of financial need. Lastly, a government financing program that meets your business' needs and for which your business is eligible can be difficult to find and should not be relied on to fund future plans. More information regarding grants that may be able to help your brewery can be found in our blog posts on government grants and government grants for hiring.
Crowdfunding is a new player in the financing game. The term crowdfunding has been around for less than 10 years, yet this type of funding raised over $5.1 billion worldwide in 2013. Crowdfunding is typically sourced through an online portal and has financed projects as large as $59 million.
The beer-making industry is no stranger to crowdfunding; for example, CrowdBrewed allows beer lovers from around the world to contribute to projects that interest them. There are both expected and unexpected benefits of crowdfunding. It enables fast access to capital, advertising and PR and can validate your business concept.
However, most crowdfunding campaigns struggle to meet their financing goals. Furthermore, projects become inflexible due to the fact that changing the terms of the crowdfunding agreement would be very difficult as it would require a new agreement between your business and every investor (potentially hundreds).
4. Equipment Financing
Equipment financing (leasing) is essentially an extended rental agreement wherein the owner of the equipment allows the user to make use of the equipment in exchange for periodic lease payments. It is an extremely popular option for companies of all sizes and it is estimated that 80% of all companies lease at least some of their equipment.
The main benefit of leasing equipment is that it allows businesses to get the equipment they need without tying up much needed capital. There are also possible tax advantages when leasing versus purchasing equipment.
However, leasing equipment can often cost more money in the long run versus purchasing the equipment outright. Agreements can also be quite complex, sometimes making them more complicated to manage than an outright sale.
5. Accounts Receivable Financing
Accounts receivable financing is an arrangement in which a business sells its outstanding invoices or receivables at a discount to a financing or factoring company that assumes the risk of collecting the receivables and provides up-front cash to your business.
The benefits to accounts receivable financing are it frees up working capital tied up in your accounts receivable, it is a quick method of cash injection and it frees up company resources to focus on more productive activities. However, these benefits do not come without a major drawback. The discount at which your business' accounts receivable is sold often greatly exceeds the interest on a typical commercial loan.
6. 'Love' Money
In addition to the financing methods listed above, self-funding and borrowing from friends and family are common ways for businesses to raise money. This is a convenient way to raise funds, especially if your business is having difficulty obtaining financing through the other means listed throughout this blog.
The major benefit lies in each loan's flexibility; interest, repayment terms and fees can all be negotiated to fit your business. However, the risks can often extend outside a normal business environment and impact your personal life in unexpected ways. To mitigate these risks, it is best to put a contract in place to formalize the arrangement (beer for life could sweeten the deal).
7. Private Investors
There are many different private investors offering different types of financing in order to earn a return on their money. Their decision to provide financing comes down to the merits of the business, that is, an assessment of risk versus their potential return if they invest in your business. Private investors can provide loans, but typically they participate in equity financing as angel investors, venture capitalists or business incubators.
The major benefit is your business can use the raised money to pay business expenses rather than large loan payments. Additionally, as long as the risks are disclosed, investors typically understand and accept that they are not guaranteed to get their money back. On the other hand, equity investors usually take a larger share of your business' profits and will own a piece of the business in return for their investment. There are a number of potential investors waiting for the perfect brewery; finding these investors is the next step.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.