Raising Debt for Your Startup Brewery

Starting a brewery requires a significant capital outlay, and raising debt is one of the primary means to obtain the necessary funds. Here are some common avenues for startup breweries to raise debt:

1. Traditional Bank Loans: Banks offer a variety of loan products suitable for startup breweries. If you have a solid business plan, decent credit, and some collateral, a bank loan might be an option. However, be prepared for rigorous scrutiny, especially if you're a first-time entrepreneur.
2. SBA 7(a) Loan Program: The U.S. Small Business Administration (SBA) 7(a) loan program offers loans to small businesses, with the SBA guaranteeing a portion of the loan. This guarantee reduces the risk for lenders, often leading to favorable terms, such as lower interest rates and longer repayment periods.
3. Equipment Financing: Instead of purchasing brewing equipment outright, many startups opt for equipment financing or leasing. In this arrangement, a lender or leasing company provides the funds to purchase the equipment, which then serves as collateral for the loan.
4. Vendor Financing: Some suppliers or vendors offer financing options, especially for bulk purchases. They might extend credit terms, allowing the brewery to repay the debt in installments.
5. Microloans: Several nonprofit organizations and community lenders provide smaller loans, typically under $50,000, to help startups and small businesses. While the loan amounts might be smaller, microloans can be easier to obtain than traditional bank loans.
6. Crowdfunding: Platforms like Kickstarter or Indiegogo allow startups to raise small amounts of money from many backers. While these platforms traditionally operate on a rewards-based system, there are crowdfunding options where backers can lend money in return for interest, such as on the Kiva platform.
7. Peer-to-peer (P2P) Lending: Platforms like LendingClub or Prosper connect individual lenders with borrowers. Breweries can pitch their business idea and, if it resonates with lenders, secure funding. P2P loans tend to have higher interest rates than traditional loans, but they might be more accessible to startups.
8. Bonds: Some breweries have ventured into issuing mini-bonds. These are essentially IOUs where the brewery promises to repay investors, usually with interest, over a specified period.
9. Credit Cards: While not the most advisable due to high interest rates, some entrepreneurs use business credit cards as a short-term financing solution, especially for smaller expenses.
10. Family and Friends: Many entrepreneurs start by borrowing from trusted family and friends. While this can be one of the easiest ways to secure funding, it comes with its own set of challenges, especially regarding relationships if the business faces difficulties.

For aspiring brewery owners in the U.S., the Small Business Administration (SBA) 7(a) loan program presents an attractive option for debt financing. Designed to assist small businesses in obtaining necessary capital, it’s especially beneficial for industries like brewing, which can face high startup costs.

What is the SBA 7(a) Loan Program?

The SBA 7(a) loan program is the SBA's primary program for providing financial assistance to small businesses. While the SBA doesn’t lend money directly, it sets the guidelines and guarantees a portion of the loan, which reduces the risk for its lending partners.

Benefits of SBA 7(a) Financing for Breweries:

1. Higher Loan Amounts: SBA 7(a) loans can offer up to $5 million, which can cover a significant portion of a brewery's startup and operational costs.
2. Longer Terms: These loans come with longer repayment terms, often up to 10 years for equipment and 25 years for real estate, resulting in smaller monthly payments.
3. Lower Down Payments: Compared to conventional loans, SBA 7(a) loans often require smaller down payments, which can be advantageous for new businesses with limited capital.
4. Flexible Use of Funds: The funds from an SBA 7(a) loan can be used for a variety of purposes, including purchasing equipment, real estate, working capital, or even refinancing existing debt.

Considerations for Breweries:

1. Eligibility Criteria: Your brewery needs to meet the SBA's definition of a small business, which often involves certain revenue benchmarks and the number of employees.
2. Detailed Business Plan: Lenders will want a comprehensive business plan that provides insight into your brewery's projected financial performance, market research, and operational strategy.
3. Collateral: While SBA 7(a) loans might not always require collateral, having it can increase the chances of approval. Assets such as brewing equipment, real estate, or other tangible property can serve as collateral.
4. Personal Guarantee: Business owners holding a 20% or more stake in the brewery may be required to provide a personal guarantee, putting personal assets at risk if the business defaults.
5. Interest Rates: Though the SBA caps the maximum interest rates for its 7(a) loans, they can still vary based on the amount borrowed and the maturity of the loan.

Conclusion

When raising debt, it's essential for brewery startups to understand the associated costs and obligations. Thoroughly research each option, compare interest rates, and assess repayment terms. Engaging with a financial advisor or consultant with expertise in the brewery industry can offer insights and guidance on the best avenues to pursue. Regardless of the route chosen, a solid business plan and a clear vision for the brewery will be crucial in convincing lenders and investors to support the endeavor.

The SBA 7(a) loan program is an excellent avenue for breweries to secure the capital they need, especially when traditional financing might be out of reach. However, like all financing decisions, it’s crucial to weigh the benefits against the responsibilities and potential risks. Engage with a financial advisor familiar with the brewery industry and the specifics of SBA lending to ensure you make the best decision for your brewing venture. Remember, a strategic approach to financing can set your brewery on the path to success and sustainability.