At BaneBio, we help scientists create magic through distillation, fermentation and plain old experimentation. Some of our offerings include many different types of glassware, equipment and specialized fermentation instrumentation. We are capable to satisfy effectively the evolving needs of the home brewers, nano breweries, wineries, and local distilleries. Our specialized glassware and equipment can be found here.
Financing for Brewery Expansion
Research has projected the global beer market to be valued at $318 billion by 2020. Increasingly popular are the microbreweries, which are opening shops and fine-tuning their craft. As of the end of 2017, 6,266 craft breweries were operating in the U.S., a 16% increase from 2016. Although growth for craft brewers has been slowing for a while as the market reaches saturation, brewers are looking for expanding capacity and exploring ways to stay competitive in the industry. There are two common SBA financing programs that brewers can use for brewery capacity expansion.
SBA Guaranteed Programs. Breweries and privately held businesses, operating in the United States, can receive financing from the SBA loans to purchase equipment necessary for their expansion needs. Since the SBA partners with banks and other lenders, under such partnership, the SBA provides those lenders with a guaranty against a loss on such loans. This SBA guaranty is given in exchange for a fee, paid by the loan borrower, which can be rolled into the loan. To qualify for an SBA loan, the brewery must pledge the assets of the company to the loan. Also, the owners, who have at least 20% equity in the brewery company, must personally guaranty the debt. The loans are most commonly used to finance equipment purchases, real estate acquisitions or to provide working capital.
To allow the lenders to approve the SBA guaranteed loan programs in-house, the SBA has established a list of SBA Preferred Lenders or SBA Express Lenders. Breweries, choosing to work with such lenders can enjoy a streamlined process and reduced turnaround time associated with the SBA loans. Also, breweries, that need a bank/lender to partner with in the long-run, can choose a bank that plans to keep their loan in their portfolio in order to avoid future imposed limitations on the lenders ability to amend the loan. Moreover, breweries that would need a loan to support working capital in the future can initially find out whether the potential bank/lender also supports working capital lines.
The SBA 504 Program. For breweries that need financing for larger projects, the SBA 504 Programs come in place, when the projects are in excess of $750,000. Under this program, the SBA issues bonds to the investors, on a monthly basis, and the SBA uses all proceeds from the bond sales to provide direct loans to the breweries and other businesses. Depending on the project scope, the borrower is required to put in 10% or 15% equity. The bank or other lender then will fund a term loan that will equal to 50% of the project, and it will also issue a second short-term loan – equal to the balance of the project. Upon project completion and disbursement of all funds, the SBA will pool all of the 504 projects for the month and the SBA will issue a bond, the proceeds of which will be used to pay off the short-term loan and to provide permanent financing.
The SBA 504 program allows for two main benefits. First, an equity amount, required for the project can be reduced to 10%-15%, compared to conventional real estate transactions that would require 20% equity. Second benefit for the businesses, is the fixed, long-term interest rate on the bond portion of the loan for the life of the loan – in comparison, most banks re-price loans every five years. Finally, under the SBA 504 program, a portion of the underwriting is performed in combination with a non-profit Certified Development Company (CDC) in every state, which represents another great resource for businesses to obtain assistance with questions.
Profitable Wineries and Investment Insights
The U.S. wine market size was estimated at USD 61.80 billion in 2017. The growing consumer preference for the low percentage of Alcohol by Volume (ABV) blends is expected to drive market growth. The wide range of products with multiple flavors across all categories and price points including popular, premium, and luxury segment is expected to drive the market growth further too.
Staying profitable. In a research study on premium wineries it was shown that wineries meet operating costs, repay debt, and produce positive cash flows within the first three to four years, and within five years for small size wineries. Wineries had the ability to become self-sustaining business entities, when producing and selling at maximum capacity, even if using new equipment only. Depreciation of capital assets represented the highest percentage of fixed costs that wineries incur. The research assumed the following equipment loan amounts used to construct the wineries:
|Winery||Equipment Loan ($)|
|Source: A winery industry study of Washington State University|
In the research, winery equipment loans were amortized over a five-year period at a 7 percent interest rate. The equipment loans had a debt to equity ratio of 85:15, and were charged one percent loan origination fees. Small wineries also had positive NPVs and 10% – 20% IRRs, greater than the cost of capital.
Profitability. The most feasible and successful winery investment for an investor would be the 10,000-case winery, with an NPV of $867,076 and the highest IRR of 25.66 percent, followed by the 15,000 case winery with NPV of $999,767 and the second highest IRR of 22.33 percent.
Ease of Expansion. The easiest expansion opportunities exist when moving from the 2,000 to the 5,000 case wineries , where equipment capacity was fairly similar, but the 5,000 case winery had 2.5 times the output of the 2,000 case winery and investment costs were 1.4 times as much only.
Craft Spirits Market Highlights
With a global market size of over $6.13 billion and an expected growth rate of 33.4% (CAGR) from 2017 to 2025, craft spirits industry is mainly concentrated in North America. Due to the favorable approval policies, investments in the industry have increased at a promising rate. Craft spirits are domestically produced in licensed distilleries, which have a production volume below 750,000 gallons. Their operations are independent, less than 25% capital and operational control from another alcoholic beverage industry business. In the U.S., the product must be labeled, showing they have been approved by the Alcohol and Tobacco Tax and Trade Bureau (TTB).
Simplified registration timelines and simpler approval process motivate the launching of various products in the U.S. industry segment. To enter the segment distilleries need to meet two legal requirements from the state level and federal level. At the national level, the distilleries are required to have the Certificate of Label Approval (COLA), which can be obtained not earlier than 3 to 12 weeks depending on the product category and complexity. The state level registration and approval period takes 1 to 8 weeks.
Rapid demand and supportive industry policies will continue attract significant investments in the U.S. craft spirits industry in the next few years.
The growth in the market segment is highly influenced by few more factors. Spirits are increasingly preferred by the American consumers and a growing share of young drinkers, who are willing to pay a premium for fresh brands, that give them higher originality and a unique identity. U.S. distillers have been making significant investments in production capacity as well as marketing — through tasting rooms and targeted messaging. These consumers have expressed their distinct brand preferences towards products that have “cool”, sustainable, experiential, and personalized appeal. For craft distillers, this implies more emphasis on:
- Quality products for ensuring a long-term success of the craft brands.
- Stronger brand promotions to build the right perceptions of the everyday consumer
- Stronger marketing capabilities, digging into the interests of their target market demographics (via digital and off-line campaigns)
- Building unique tasting experiences at their distilleries (where approximately 25 percent of sales occur).
- A diversified portfolio, offering a mix of product categories (brown, clear spirits) to prevent supply constraints and to capture opportunities for further growth.
- Catering to a wider range of consumer occasions and taste profiles including sipping drinks and high-end cocktails.
- Enhanced production capacity available to a craft distiller to capture near-term growth potential
The US craft spirits industry is expected to grow dramatically, and by 2020, volumes are expected to grow to 25.6 million cases — an annual growth rate of about 40 percent. About 1,300 distillers collectively hold down approximately 2.2 percent volume share of the overall spirits market in 2017, and craft beer holds about 13 percent of the overall beer market.