Whenever an entrepreneur is opening a brewery or currently is operating a brewery, he or she is faced with the decision to either purchase, finance, or lease the brewing equipment. There are three main times breweries are faced with equipment challenges. The first is when they first open their brewery. The second is when they are expanding. The final time is when they are introducing a new product which requires a new piece of equipment. This post will discuss these three main times and the pros and cons of purchasing, financing, and leasing brewery equipment.
When opening a brewery, the owners are faced with how they will acquire the brewery equipment. One option is to purchase the equipment in the beginning of operation. This option has its pros and cons. If you have the capital to purchase the equipment and enough cash flow leftover for operations or reserve then this can be a great idea. It also will save the brewery money in the long term because they will not be paying for additional interest incurred. However, it is often difficult to raise enough capital in the beginning to purchase equipment outright. If cash flow is a concern then this option can lead to a strain on the business and in extreme situations lead to a business closing before it had a chance to succeed. Financing or leasing equipment is another option to consider when opening a new brewery. With this option, owners typically receive financing through the bank for a specific amount. The loan is normally good for several aspects in the business including working capital, operations, as well as equipment or property. There are many different loans available that cover a variety of needs. By offering the brewery equipment as collateral for the loan or lease, equipment financing offers lower interest rates and payment terms regardless of the borrower’s credit score or amount of time in business.
When a brewery is expanding either the amount of equipment or the brewery system altogether, they are faced with different challenges to consider. If the brewery has been in business for a while, they may be in a good place in terms of cash flow and are able to purchase the equipment. Being in business for a period of time also allows them to receive a loan easier. A brewery may choose to take out a loan to keep their cash flow levels the same and pay off the loan quick to reduce the amount of interest.
When a brewery needs new equipment for a new product or to replace old equipment, it is normally one piece of equipment and the cost is typically lower. With this challenge, a brewery may be able to pay for the equipment due to the small cost associated with the equipment. Breweries will most likely not be able to take out or loan due to the small amount needed. Leasing the equipment, however, is another option. Breweries are able to pay on the equipment monthly until the piece of equipment is paid off.
I have been doing a lot of research on the current trends in the craft beer industry and what trends could look like in 2018. It is critical to understand where the trends will go because they are based off consumer preferences. Listed below are some trends I believe will have an impact on the craft beer industry in 2018.
Experimenting with new beers has been a trend that I believe will continue in 2018 and for many years to come. It is what has fueled the rise of craft beer. Customers are able to try a lot of different varieties of beer at one location.
NE Style IPA’s have started to become the new crave already in 2017. For those who have not yet tried this style of IPA they are hazy, yeasty beers with a mouthful of fruity flavors. They are starting to pop up all over the eastern coast and I believe will become the biggest trend in 2018.
Canning is starting to become more prominent in small, local breweries that can not necessarily afford a canning line. There are now a couple of alternatives which have helped breweries bring cans to their customers. One way they have been able to do this is through Crowlers. Oscar Blues invented the Crowler which is essentially a big can instead of using a Growler made out of glass. Breweries can now purchase a Crowler Machine for around $5,000 and fill up their 12, 16, or 32-ounce cans right there at the brewery. Another way is through mobile canning companies. There are multiple canning companies that will now come to your brewery and can your beers.
What better way to differentiate your brand than through artwork. As more and more breweries emerge, it is important to create a brand that will stand out and relate to customers. Artwork has been seen on many beer cans and bottles featuring different beers. I believe this will continue to be a trend and local artists will help with design for local beer products that emerge.
I have seen the trend in my own town of Asheville, NC where every brewery wants to be as close to downtown as possible in order get the foot traffic from locals and tourists alike. This has been a good approach but now breweries have almost created saturation inside their own market by doing so. I can see this happening throughout the United States. It makes sense that cities and downtown areas will be the best location for customers to visit your brewery. As this continues though, I can see breweries stepping outside of the city limits and finding small towns and other places to build a brewery. Breweries will also look to be different by their location or even the structures used. Some breweries have started to utilize train cars, barns and stables, and even other structures such as shipping containers. This trend will only continue as more and more breweries open in the U.S.
The article, “3 Craft Beer Industry Trends Breweries Need to Know”, lists a couple of craft beer trends that could differentiate beer brands. One trend that could catch on are brewery memberships. Perks such as access to early bottle releases, exclusive events and festivals for members only, and guaranteed tickets to brewery events can increase loyalty for the brand and create excitement for customers. It will also add additional revenue streams to the brewery. Another example for differentiating a brewery is through giving back either locally or for certain causes. The article states that seventy-five percent of Millennial's say, “it’s important to them that brands they support give back to society instead of just making a profit.” I have seen this trend with many of the local breweries here in Asheville, NC whether it is giving back to a local charity or informing customers of a cause they are trying to support.
It is often difficult for a startup to receive loans from local, regional and national banks. The Small Business Administration has become an alternative option for startups to receive funding. The Small Business Administration was founded on July 30, 1953 and provides loans, loan guarantees, and other assistance to small businesses. The SBA has a variety of programs depending on the borrower’s needs. Two programs that have been helpful for small craft breweries are the 7(a) and CDC/504.
The SBA 7(a) is the most common loan program. To be eligible for assistance businesses must meet certain criteria. The business must operate for profit and be small. The definition “small” varies by industry and is based on the size standard of that industry. Small business size standard represents the largest size a business may be to remain classified as small and is stated by the number of employees or average annual receipts. Breweries size standards in number of employees is 1,250. The business must also be in the United States, have reasonable invested equity, have alternative financial resources, and use the funds for a sound business purpose. There are also a list of ineligible businesses listed on the SBA website. The 7(a) loan can be used for a variety of finance and business purposes. Some of these include short-term or long-term working capital, purchasing equipment, machinery, furniture, supplies or materials, purchasing real estate, constructing a new building, refinancing existing business debt, or establishing a new business. The SBA does not set a minimum loan amount but has a maximum loan amount of $5 million. The fees vary depending on the loan amount. They can range from 0% for loans under $150,000, 3% for loans $700,000 or more, and up to 3.75% for loans of $1,000,000 or more. Interest rates are negotiated between the applicant and the lender and can include both fixed and variable interest rates. The SBA can guarantee as much as eighty-five percent of loans up to $150,000 and seventy-five percent on loans of more than $150,000.
CDC, community development corporation, are not-for-profit organization incorporated to provide programs and engage in other activities that support community development. The CDC/504 Loan Program is primarily used to provide financing for major fixed assets. This can include the purchase of land, existing buildings, construction of a new facility, improvements to the building, or long-term equipment. It cannot be used for working capital or inventory. This loan is good for a brewery that is only seeking funding for brewery equipment or improvements on the building. For a CDC/504 program, a bank partner will provide 50% of the loan, a CDC will guarantee another 40% of the loan, and the remaining 10% is borrower equity. However, in some circumstances the borrower may be required to contribute up to 20%. The loan amounts are determined by how the funds will be used and rates are fixed. Unlike the 7(a), the CDC/504 is limited in what it can be used for and might not be the best option depending on what the brewery needs the funds for.
There have been a few breweries that have found success using the SBA for loans. One in particular is Upstream Brewing Company. Upstream Brewing Company was able to get a SBA-guaranteed loan from a national bank for $750,000 to pay for a new brewhouse, equipment, and furnishings for a new location in Omaha. They had success for many years and when they were ready to renew their lease they looked into purchasing the property outright. Upstream Brewing Company reached out to another approved lender under the SBA for a 504 loan. They were able to be approved for a $1.4 million 504 loan in 2012 to purchase the location. Brain Magee, president and owner of Upstream Brewing Company, said that without the help of the SBA’s 504 loan program, it might not be a stretch that Upstream Brewing Company’s west Omaha location would have vanished from the scene.
Based on information in “Entrepreneurial Finance”, by Steven Rogers, there are several ways for improving your chances as an entrepreneur in obtaining an SBA-guaranteed loan. One way to do this is by ensuring you have good credit history and no personal financial problems. Having an excellent business plan that outlines realistic goals and forecasts can increase the likelihood of receiving a loan. Utilizing other services and programs such as Small Business Development Centers (SBDCs), SCORE, and Small Business Learning Centers can help with management and technical assistance, business plan preparation, and training tools.
“Table of Small Business Size Standards Matched to North American Industry Classification System Codes.” U.S. Small Business Administration, 26 Feb. 2016, www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf. Accessed 27 Sept. 2017.
“General Small Business Loans: 7(a).” Loan and Grants, SBA, www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/general-small-business-loans-7a. Accessed 27 Sept. 2017.
“SBA Loan.” Entrepreneur, www.entrepreneur.com/encyclopedia/sba-loan#. Accessed 26 Sept. 2017.
“Crafting a brewing business: Upstream looks to 504 deal to improve cash flow.” SBA, www.sba.gov/offices/district/ne/omaha/success-stories/crafting-brewing-business-upstream-looks-504-deal-improve-cash-flow. Accessed 28 Sept. 2017.
Rogers, Steven. Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur. Third ed., McGraw Hill Education, 2014.
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