What’s Your Brewery’s Growth Strategy?

In the current world of craft brewery ownership, you may find yourself in one of three places:

a. You are currently expanding

b. You just completed an expansion

c. You are planning for your next expansion

With the overwhelming growth that craft beer is experiencing, it can feel like you are never quite able to produce enough beer to satisfy demand. By the time the equipment from your previous expansion has been delivered, installed and operational, demand has already outstripped your new production capabilities. It is difficult to generate enough cash from the business to keep up with the capital demands of brewery expansions. This cash crunch leaves owners with two possibilities: either accept slow growth while your competitor’s growth skyrockets, or find access to capital.

For most, this boils down to raising capital via equity or debt.

Equity financing is becoming a more viable source of capital for craft breweries because investors are catching on to what you already know: the industry is booming and there are no signs of it slowing down anytime soon. Accepting equity capital is one of the more difficult decisions to get right, however, because you and the investor have competing goals at the time of the equity raise. You want to preserve as much of the ownership of your business as possible while obtaining the maximum amount of cash for the portion that you sell, whereas the investor wants the exact opposite. It is only after cash and equity in your business changes hands that your interests are aligned.

Debt financing, on the other hand, aligns your interests with your lender through the entire process. Since a lender must be repaid on a monthly basis, it is of vital importance to them that a loan made to the business be of an appropriate size and repayment term. The difficulty with debt financing is finding a lender willing to make a loan to you. In contrast to investors, lenders are not looking to make a speculative investment in your business and hope it pays off; they are looking for signs that the business has stable and predictable profitability over time. Craft breweries generally have difficulty demonstrating this predictability in historic profitability — the rapid growth of the sector often means that the repayment of your loan will not be based on what you earned last year, but what you will earn next year as a result of your expansion. In order to obtain debt financing, it’s important to find a lender that understands the industry and can evaluate your business accordingly.

A word of caution regarding non-bank lenders as they can impose easy money but with harsh repayment terms that can include credit card like interest rates to be paid off over very short terms. At Live Oak Bank, we have a team of lenders dedicated to the Craft Beer industry that understand the difficulties that a growing brewery faces. We work with you to analyze your historical as well as projected growth to develop an expansion plan that meets your needs with competitive bank loan products.

Equipment purchases should be made strategically, with attention paid to both the size of the expansion (too large and you’ll be saddled with debt on equipment that is not being fully utilized, too small and you’ll outgrow it before you’ve paid much principal on the debt) as well as the timing (taking into consideration lead times on equipment orders with your suppliers as well as current and projected barrel production).

Real estate considerations must also be made strategically in cases where physical space is the factor limiting growth. If you are currently leasing, should you look to purchase or lease a larger location? If you own your building, should you expand on site, and if so, by how much?

If you are a growing brewery looking to expand your production capabilities, a loan from Live Oak Bank may be the solution. We welcome the opportunity to speak with you.

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