Balancing Startup Costs in Your Brewery Budget and How to Fund Your Initial Startup Capital Costs

When opening a brewery, understanding startup costs and how to fund your startup. Let's dive deeper into these financial elements and how they'll influence your startup budget.

Startup Capital Costs

In addition to your ongoing operating expenses, you'll have to factor in startup and capital costs such as the cost of procuring your craft brewery equipment package. These are some of the costs that makeup the one-time investment required to kickstart your operations:

1. Fixed assets: This includes the cost of buying or leasing your brewery equipment package, installing your brewery and taproom equipment, setting up the brewery infrastructure, and even acquiring vehicles for distribution.
2. Startup expenses: These are costs associated with getting your brewery off the ground, such as feasibility studies, consultant fees, pre-opening payroll/debt/lease payments, and go-to-market branding/marketing efforts.
3. Working capital: Cash reserves are crucial, especially during the initial stages when the revenue stream might not be steady. This includes funds to cover ingredients, payroll, and other short-term expenses.

Funding Your Initial Capital Costs

To get your brewery off the ground, you’ll need to raise the capital needed for these startup costs. Generally, you will either raise equity (direct investment) or debt (a loan with regular payments).

Equity (Direct Investment)

Equity refers to the ownership interest in a company. When you raise equity for your brewery, you are essentially selling a piece of the business to investors. In exchange for their investment, these investors receive shares or a percentage of ownership in the brewery.

• Pros of Equity Financing:
• No repayment obligation: Unlike a loan, you don't have to pay back the money raised through equity.
• Alignment of interests: Investors become partners in the business and generally have a vested interest in the success of the brewery.
• Flexibility: Equity doesn't require regular payments, so it might offer more financial flexibility, especially in the startup phase.
• Cons of Equity Financing:
• Dilution of control: Selling ownership means giving up a part of the control over the business, which might lead to conflicts with investors.
• Potential loss of profits: As owners, equity investors are entitled to a share of the profits.

Debt (A Loan with Regular Payments)

Debt financing refers to borrowing money that must be repaid over time with interest. The borrowed funds can come from various sources, including banks, private lenders, or through instruments like bonds.

• Pros of Debt Financing:
• Retained ownership: Unlike equity, borrowing money doesn't involve giving up any ownership of the brewery.
• Tax benefits: Interest on business loans may be tax-deductible.
• Predictable payments: Loans come with agreed-upon terms and a clear repayment schedule.
• Cons of Debt Financing:
• Repayment obligation: Loans must be repaid with interest, which can put pressure on cash flow.
• Cash Flow/Risk of default: Failure to repay the loan can have serious consequences, including foreclosure or bankruptcy.

Typical Ratios: The ideal debt-to-equity ratio varies across industries, but for many startups, a ratio between 0.5 to 1.5 is considered healthy. Many new startup breweries may be able to increase their debt-to-equity ratio using SBA-backed debt. In the brewery industry, it's common for startups to have a higher equity portion due to the high initial capital costs and the uncertainty of the early stages of the business when not using SBA-backed debt. As the brewery establishes itself and demonstrates profitability, it becomes easier to leverage debt for expansion or other needs.

Conclusion

When deciding between equity and debt to finance your brewery, consider the unique needs, goals, and risk tolerance of your business. Equity might be a suitable option if you're looking for aligned partners and willing to share ownership. Debt might be preferable if retaining full control is essential, and you're confident in your ability to manage repayments.

Balancing debt and equity is more of an art than a science. It requires a careful consideration of your risk tolerance, financial projections, growth ambitions, and the current market landscape. Engaging with financial professionals and crafting a well-thought-out business plan will help you determine the best financing mix for your particular situation. Discuss your plans with your bankers early and often during the planning phases to get an idea of what is feasible. Remember, the key is to create a capital structure that ensures financial stability, allows flexibility, and maximizes value for your brewery. Cheers to making savvy financial moves on your brewery journey!