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Bank loan or private investors?

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  • Bank loan or private investors?

    I'm currently weighing my options for financing my startup. Does anyone have any thoughts as far as pros/cons for trying to get a bank loan (if possible) vs. taking money from family/friends as investors?
    Also, does anyone have any recent experience with getting bank funding in the US? Thoughts?

  • #2
    Good Luck with Banks

    I recently started my brewery with a limited partnership. I went to 5 or 6 banks, all of which told me that I was one of the more prepared people to ever come into their office, but a brewery is just too high risk business for their tight asses right now.

    Here is my suggestion. Use the banks as a refinement tool for your business plan. These guys know what they are talking about. Make your business plan with numbers for a bank (monthly payments to them), take it to some banks and see what they say and do a little more refinement. I started with national branches and worked my way down to the small local branches because I knew the national banks were a slim to none chance of giving funding. By the time you make it from regional banks down to local banks your plan will be much more refined to what a banker is wanting to see and you will have a higher probability of success, although probably still not great. At this point, if you are rejected by all banks you are sitting on a business plan that needs little changing for private investors and is so refined they will have a hard time turning you down.

    The way my limited partnership is set up is the investors get 100% of the net profits until the note has been paid off. At that point I will receive 60% of the net profits and the investors will receive 40% of the net profits to be divided on a pro rata basis amonst themselves. You will want to make sure that you have a right of refusal on sale of shares so you investors can't sell back to AB without consulting you first. Get yourself a good lawyer and expect around $20K in set fees and SEC approval.



    • #3
      thanks for the advice


      • #4
        Also look in to your local chamber of commerce and also any local our county development groups. I was able to use partial funding from 2 different local development groups. The groups have government backed revolving loans available for certain percents of new businesses start up costs. With their partial funding I was able to get the local bank to step in for the other part of the funding.

        I was also told that our business plan was one of the more complete plans they have seen in years. It included market analysis, statements of purpose, mission statements, sales forecasts for 5 years out broken down to per ticket sales, daily and monthly sales forecasts. I also had detailed spread sheets for every single item I needed to buy down to the exact count of 2x4's that would need to be bought. In my proposal I requested 100% financing and in turn I supplied 100% of the labor to renovate and build the place. With the insane amount of planning and paper work I had I was able to secure 100% financing I needed.


        • #5
          I totally agree with Fennellys, what you just described make all the difference in if the loan will even be considered, let alone approved. Being a commercial banker and specializing in SBA loans, I see many of packages and the ones that are well put together make a world of difference on turn around. I have actually financed 3 start-ups and two expansions, and really became an expert in brewery financing. I took the time to learn and understand the industry and how a brewery, works from to grain to keg. that makes a difference too, in the approval process, having a lender understand everything.


          • #6
            Originally posted by Fennellys View Post
            I was also told that our business plan was one of the more complete plans they have seen in years. It included market analysis, statements of purpose, mission statements, sales forecasts for 5 years out broken down to per ticket sales, daily and monthly sales forecasts.
            ^ A million times, that. I've seen a ton of really poorly-made business plans, and the people who made them can't figure out why no one will invest in their startup. If your business plan is good, you won't need friends and family to fund it.

            I wouldn't waste my time going to major banks. A regional or local bank has a much bigger stake in the success of their community, so they're more likely to invest in you than Wells Fargo.

            Something else to keep in mind: Debt is cheaper than equity (because interest on debt is an expense that decreases your tax liability, while equity is fully-taxed)
            Last edited by nateo; 02-20-2013, 03:44 PM.


            • #7
              I would also look at working with your local Small Business Development Center. I'm currently working with mine and they have given me a great starting point for my business plan. Also if you can get others to share their business plans with you (even if not in the same industry) then take advanatage of it!

              I also agree w the part about approaching large banks. I actually work for a large bank and have been told many times that we do not like to fund restaraunts (which they consider breweries/pubs), hotels etc.... Our bank underwrites pretty tightly, (probably why we survived) so like the other guy said might be good to get your sales speech down and work your way to the community bank level. The last guy I will approach is the president of a community bank and when I get to him I hope to have a knock out sales pitch. And let's be honest that's what it is... selling the bank on the opportunity... just like you will have to sell your customers and distributors/bars on. Why should we go with you and not AB/Miller etc....


              • #8
                Your business plan is the key... either way

                I work a LOT with small businesses. I tend to see folks even before the banks do. And, while I concur with all the folks who have commented so far, I would spend a ton of time on your business plan. Then, once you think you're done, put it down for a week and come back to it and spend, probably another 50% more time on it.

                I hear brewers, all the time, say that to find out how much money you need: "take your best estimate and double it." I think part of that is just the facts of like. The other part is not enough time spent on *realistic* expectations and forecasts in your business plan. Business plans should include (in my opinion) estimates for:
                - Equipment cost
                - Construction costs
                - Administrative and support staff/time/materials/costs
                - Marketing costs
                - Kegs (i'd actually list this separately for breweries)
                - Property/facility costs
                - Licensing and permitting
                - Raw materials costs
                - Shipping (raw materials and product)
                - Utilities
                - Gross Sales (by segment - on site, off site, kegs (by size), bottles/cans, donated beer, festival sales, every variation that you can think of)
                - Salaries / commissions
                - Cost of Goods Sold
                - Retained earnings
                - Cash flow
                - Overall (cumulative spending) over time
                - ROI
                - Debt load

                And each one should probably be forecasted starting 1-2 years before opening and going out 3-5 years after opening AND each one should be done as a HI, LO, and Most Likely estimate.

                Each of these (above) are really hard-data driven; numbers and facts/figures. Then you have to start adding on issues of growth strategy, marketing tactical plan, investor repayment, organization, risk identification and mitigation, tax strategy and local incentives, construction timelines and milestones, contingency planning... the list can go on and on.

                When someone comes to me with a brewery idea and their business plan is less than 50 pages, I think that they haven't given this enough thought. At least, not enough thought to convince a size-able investor to invest size-able money (debt or equity).

                Whether you go with financing, investors, friends/family, whatever - spend/take the time you need to develop a solid business plan and you'll find it much easier.

                Sorry, hope I didn't take this too far off the track from the original question...
                John Szymankiewicz PE, Esq
                Beer Law Center


                • #9
                  An equity partner typically cost a lot more then the worst financing. A common partnership scenario is one partner has the expertise and is responsible for getting the work done and the other partner puts up the start-up capital, splitting the profits down the middle. Venture capitalist typically want more than 50% of the profits plus control of your company. If you have to take on a partner a friend or family member might be a good source of funds but there is a chance you could damage your relationships forever.

                  I’ve been involved in finance for 25 year and 5 of those years were with a venture capital club of 3,000 small investors. I’m currently with a company that finances all types of new and use equipment for established companies and start-ups. If you have any questions about financing your brewery, please give me a call.

                  Richard Busch
                  iFinancial Group
                  888.852.5155 ext. 230