Microbrewery - Craft Beer Financing

As our economy moved more and more towards supporting smaller local businesses with something unique to offer, Microbreweries are becoming increasingly popular. Even with small brewing operations, there is a significant need for equipment, staff, and an expanded location to facilitate growth. Microbreweries face a range of unique challenges as they grow, one of which is securing adequate funding. Here is what you need to know about finding the right craft beer financing option for your microbrewery business.

Bank loans

It takes businesses time to grow, but if you are a microbrewery with a great product, you may find your demand outstripping your supply quite quickly. As local restaurants and bars want in on your unique product, finding a source of quick funding is likely to be a top priority. Microbreweries often grow in unique ways that banks do not understand and are not sympathetic to.

Bank loans are unable to provide the kind of short-term cash injections that allow for the quick growth enjoyed by many microbreweries. Bank loans can also be difficult to obtain for young businesses. Established banks often require at least 3 years of business records to offer significant loans. For small upstart microbreweries that do not have this history, bank loans are likely to be out of reach.

When should you borrow money?

Cash flow is a business concept that refers to your business's cash position for each period. Your business has a positive cash flow if you take in more cash than you spend over a period, and if the opposite is true, you have a negative cash flow. This is one of the key indicators of your business's financial health.

Having a good cash flow is a fantastic position to be in, and it means that your business's day-to-day operations are sustainable. Borrowing money should never be a replacement for positive cash flow, and you will probably find that you struggle to procure any kind of financing without a positive cash flow.

Even if you do have a positive cash flow, you may need a bit of extra cash flow to help your business grow, and cover the cost of additional supplies, storage tanks, staff wages, a larger facility, or any of the other costs of expanding your business. If you are ready to grow your business and need additional financing to help you do that, then you are in a great place to seek financing. There is a range of financing options that you can consider depending on your needs.

Cash flow loan

Cash flow loans enable you to borrow against your expected future earnings. You give your lender the rights to certain receivables and use this as collateral for the loan. These types of loans are generally best to cover short-term expenses and pursuing immediate opportunities for profit.

In a cash flow loan, your lender will be most concerned about your current cash flow. You will be required to provide bank statements and other proof. The great thing about a cash flow loan is that it is a reasonably instant form of financing where you will be able to go through the approval process and receive cash in hand very quickly.

Revenue-based loan

A great financing option for microbreweries is revenue-based loans, which are great for new businesses because they don’t have the same restrictions on how long a business has to have been operating as banks typically do. Many revenue-based lenders will take your bank statements as proof of your ability to pay the loan back.

Revenue-based loans are also great for providing a streamlined application process without the need to fill out stacks and stacks of paperwork. The application and approval process is generally pretty quick and you can receive your money without too much time and hassle.

Because this form of financing is fast and designed to be paid back quickly, it won’t weigh you down the way a longer-term bank loan will. You can get the financing you need quickly, pay it back in a short amount of time and free up your cash flow more quickly.

Line of credit

A line of credit allows you to draw against a specified amount as you need it, instead of getting it in one lump sum. You will only pay interest on the amount that you draw, so if you are unsure of exactly how much money you might need, a line of credit could turn out cheaper. There is a range of line of credit options for entrepreneurs to consider:

1. The traditional line of credit

A traditional line of credit is an ideal choice for more experienced brewery owners who have a proven track record of success. For this option, the line of credit that lenders can offer is often larger and the rates are lower which means that the criteria for qualifying are more stringent than other options.

• Short term credit

As the name suggests, this line of credit is better suited to short-term financial needs. The interest rates for these types of loans are generally higher and the maximum amount you can borrow is generally lower.

Although this loan type does not have the most favorable terms for those borrowing, it can still be an appealing option for businesses with lower credit scores or those who are in urgent need of financing. Newer breweries may also use this line of credit option as it may be the only one they qualify for.

• Invoice line of credit

If you have customers who take a long time to pay their bills with you, that shortfall can be covered with an invoice line of credit. You will then have to pay the additional cost of interest when paying the loan back, but in a pinch, this can be a great option.

The value of the invoices owed to you determines the maximum credit you can draw, and this can go up or down as the amount owed on invoices changes. The amount of time you then have to pay back the loan is reasonably short, however, so this is another financing option that should not be relied upon over the long term.

A variation of this line of credit is called invoice factoring, which is when you sell your invoices to a third party. This could be an option if you need a quick boost of cash and you have invoices that have not been paid on time. This helps you mitigate the risk of customers not paying, but it means you are forced to accept a lower sum.

Equipment loan

If you have equipment that you own outright, you can use that equipment as collateral and borrow against it. You can typically borrow between 80% and 100% of your assets and the interest rate will depend on your lender and your credit history.

If you own your location outright, you can use this as collateral as well. Just be aware that growing breweries often have to upgrade locations frequently in the first few years of business as their operations expand. You don’t want to tie yourself to a location and then outgrow it.

For small, growing microbrewery businesses, microbrewery financing may be difficult to come by. Your business may be too new, not have adequate credit or assets, or not be eligible through traditional lenders for the kind of financing that could make an impact on your business. At South Florida Funding Group, we know the unique struggles of microbrewery entrepreneurs, but we also know the incredible opportunities this space offers. Get in touch with us to see how we can work together to get your business the funding it needs to thrive and grow.