Financing a Craft Brewery Through SBA-Guaranteed Loans
It is often difficult for a startup to receive loans from local, regional and national banks. The Small Business Administration has become an alternative option for startups to receive funding. The Small Business Administration was founded on July 30, 1953 and provides loans, loan guarantees, and other assistance to small businesses. The SBA has a variety of programs depending on the borrower’s needs. Two programs that have been helpful for small craft breweries are the 7(a) and CDC/504.
The SBA 7(a) is the most common loan program. To be eligible for assistance businesses must meet certain criteria. The business must operate for profit and be small. The definition “small” varies by industry and is based on the size standard of that industry. Small business size standard represents the largest size a business may be to remain classified as small and is stated by the number of employees or average annual receipts. Breweries size standards in number of employees is 1,250. The business must also be in the United States, have reasonable invested equity, have alternative financial resources, and use the funds for a sound business purpose. There are also a list of ineligible businesses listed on the SBA website. The 7(a) loan can be used for a variety of finance and business purposes. Some of these include short-term or long-term working capital, purchasing equipment, machinery, furniture, supplies or materials, purchasing real estate, constructing a new building, refinancing existing business debt, or establishing a new business. The SBA does not set a minimum loan amount but has a maximum loan amount of $5 million. The fees vary depending on the loan amount. They can range from 0% for loans under $150,000, 3% for loans $700,000 or more, and up to 3.75% for loans of $1,000,000 or more. Interest rates are negotiated between the applicant and the lender and can include both fixed and variable interest rates. The SBA can guarantee as much as eighty-five percent of loans up to $150,000 and seventy-five percent on loans of more than $150,000.
CDC, community development corporation, are not-for-profit organization incorporated to provide programs and engage in other activities that support community development. The CDC/504 Loan Program is primarily used to provide financing for major fixed assets. This can include the purchase of land, existing buildings, construction of a new facility, improvements to the building, or long-term equipment. It cannot be used for working capital or inventory. This loan is good for a brewery that is only seeking funding for brewery equipment or improvements on the building. For a CDC/504 program, a bank partner will provide 50% of the loan, a CDC will guarantee another 40% of the loan, and the remaining 10% is borrower equity. However, in some circumstances the borrower may be required to contribute up to 20%. The loan amounts are determined by how the funds will be used and rates are fixed. Unlike the 7(a), the CDC/504 is limited in what it can be used for and might not be the best option depending on what the brewery needs the funds for.
There have been a few breweries that have found success using the SBA for loans. One in particular is Upstream Brewing Company. Upstream Brewing Company was able to get a SBA-guaranteed loan from a national bank for $750,000 to pay for a new brewhouse, equipment, and furnishings for a new location in Omaha. They had success for many years and when they were ready to renew their lease they looked into purchasing the property outright. Upstream Brewing Company reached out to another approved lender under the SBA for a 504 loan. They were able to be approved for a $1.4 million 504 loan in 2012 to purchase the location. Brain Magee, president and owner of Upstream Brewing Company, said that without the help of the SBA’s 504 loan program, it might not be a stretch that Upstream Brewing Company’s west Omaha location would have vanished from the scene.
Based on information in “Entrepreneurial Finance”, by Steven Rogers, there are several ways for improving your chances as an entrepreneur in obtaining an SBA-guaranteed loan. One way to do this is by ensuring you have good credit history and no personal financial problems. Having an excellent business plan that outlines realistic goals and forecasts can increase the likelihood of receiving a loan. Utilizing other services and programs such as Small Business Development Centers (SBDCs), SCORE, and Small Business Learning Centers can help with management and technical assistance, business plan preparation, and training tools.