I recently ran a survey to see what you (the readers) wanted to learn more about. Through the results, I found out that one of the topics readers wanted covered was brewery financing. This was a topic I knew absolutely nothing about, so I found a willing partner who did – Rick from Brewery Finance; a company that specializes in brewery equipment leasing. Rick has worked with breweries like Maui, Ska, Del Norte, and Oskar Blues. I talked to Rick about some of the aspects of the brewery equipment leasing business, including what it takes for a brewery to get approved for financing and how the recession has affected his business. If you’re interested in learning more about Brewery Finance, you can visit their website here.  

1. Can you take me through a typical lease from the application process to the end of its life cycle?  Typically, I’ll receive a call from a brewery that is in need of equipment for an expansion, etc…They may need kegs, fermenters, a forklift…you name it.  I’ll ask them to fill out an application and fax it back to me along with a copy of the last three bank statements for the business.  From here, I can typically get the customer approved for up to about 75k.  If they need more than 75k, I’ll need to collect additional information which would include full financials for the last two years.  Once I have an approval, I’ll present the customer with a few lease options and ask them to pick the option that works best for their business goals.  Some want the smallest possible payment, while others just want to pay it off as quickly as possible.  Once the customer has picked a lease structure that works for them, and once they’ve settled on the equipment they want and the vendor that they want to purchase it from, we’re ready to move forward.  I’ll generate the lease documents, email them to the customer who will need to print and sign them.  They’ll return the originals to me along with a check (typically in the amount of their first and last payment).  Once I have the original documents and have verified that all signatures are in the right place, etc…we’ll pay the vendor up to 50% so they can start manufacturing the equipment, etc.  At this point, the lease starts and monthly payments will be billed to the customer.  Once the equipment has been delivered and the customer is happy with it, we’ll pay the vendor the remaining 50%.    At this point, the customer will continue to be billed for their monthly lease payment until the end of the contract term (typically between 36 and 60 months).  At the end of the term, the customer will usually have the option to purchase the equipment for $1.

 

2. Can you give me a view of what a typical lease structure looks like? Typical leases will be anywhere from 36-60 months in length, will terminate with either a $1 buyout option, Fair Market Value buyout option, or 10% PUT (Payment Upon Termination).  In most cases, at least one payment will be due up front and may be held as a security deposit.  Higher risk transactions may require larger amounts of money up front.  Specific numbers are going to be tough because the payment is going to be driven by credit (business and personal), time in business, average collected bank balances, etc…in other words, there isn’t a “black and white” answer, but rather all shades of grey.  Generally speaking, the longer a brewery has been in business, the more attractive the terms are going to be.  Start ups are extremely difficult to finance right now and the money is pretty expensive.

 

3. What are the incentives for a brewer to lease through your company as opposed to getting a loan from a bank for the equipment? Banks are a great place to get your working capital or an SBA Loan, but banks typically don’t understand the brewing business and seem to have a difficult time wrapping their heads around financing a fleet of kegs or a fermenter.  They don’t know the value of this equipment to a brewery and they certainly are not likely to loan you money to purchase an asset that is difficult to track, such as kegs.  Banks are going to require a large down payment and may require that you carry an off-setting balance in your account at all times.  In other words, if you get a $100,000 loan, and the bank requires a 20% deposit, they are really only loaning you $80,000.  However, your payment will be based on $100,000!  And that’s IF you can get a bank to lend you money right now.

A leasing company will finance 100% of the invoiced amount.  If you need $100,000 for a few new fermenters, we’re going to finance the full amount…plus the shipping.  Also, we don’t put a lien on your business the way a bank does.  We’ll just put a lien on the asset that we are financing.

 

4. How does your company differ from a traditional small business leasing company?  Most leasing companies are not focused on a specific niche.  They take a different approach to doing business.  Their philosophy is to get business from as many different customers or industries as possible.  This is fine and works for many equipment leasing firms.  However, I took a different approach.  I love the beer industry and want to work only with breweries.  Understanding the industry the way I do gives Brewery Finance a real advantage over other small leasing companies that might dabble with soliciting business from breweries.  I know the vendors, I know the brewers, I understand the equipment, but most importantly, I’m passionate about helping small breweries grow.  As a beer geek, nothing gives me greater satisfaction than enjoying a good beer that came out of a fermenter I financed.  Rubbing elbows with creative, innovative, and interesting people is a great way to make a living and I believe my passion for the industry and my ability to bring a great service to my customers is what sets Brewery Finance apart. Someone that doesn’t specialize in this industry will have to take a long time getting educated about it before they can bring the same value to their customers that I do.

 

5. How often do you have to deal with defaulting lenders or borrowers?  With all the financial turmoil over the last year or so, I’ve actually lost more lenders whose credit lines dried up or whose portfolios went bad than I have had customers who have stopped paying.  The craft beer industry is doing great.  My biggest problem is finding enough money to satisfy the demand for my customers’ growth (especially in the current lending environment).  Thankfully, in the last 4 years, I’ve only had one or two customers that were not able to meet their obligations.

 

6. How has the recession affected your business?  Significantly.  Not because my customers are struggling, but because my lenders are suffering.  The availability of money isn’t what it used to be just 18 months ago.  Underwriters are scrutinizing credits with much more vigor.  Credit windows have tightened up considerably.  Many of my underwriters simply have closed their doors.  Demand for financing is still high and I’m dedicated to finding the money for my customers, but to say that the recession hasn’t had a profound impact on my business would be a lie. However, I do feel momentum building again and I am optimistic for the future.

 

7. What are your application approval standards?  I work with a large network of underwriters.  The standards vary depending on the needs of the customer.  Obviously, a brewery in need of a $500,000 expansion is going to be under much higher scrutiny than a brewery looking to finance a small order of kegs for $5,000.  Suffice it to say that the longer a brewery has been in business, and the stronger the credit is of the business and the owners, the more money they’ll have access to when they need it, and the less they’ll have to “give up” in order to get that money.  If the credit is weak, or the time in business is under 2-3 years, the money is going to be more expensive, and there is less of it to go around.

 

As a general rule, a “good” risk will be a brewery that is over 3 years in operation, has good pay history on existing trades, carries a strong average bank balance (at least $10,000), and whose ownership has a personal credit score of over 700 with homeownership and low revolving debt.  A company like this can qualify for up to $75,000 in equipment financing based on just a one page application.

However, a company with under 3 years in business, or a company with some hiccups surrounding their business or personal credit is going to have a tougher time.  We still may be able to get them qualified for all the equipment financing they need, but it will come at a higher price. 

Thanks again to Rick from Brewery Finance, if you have any further questions or want to learn more, make sure you check out their website here.