Bank Loans

[Sweetwater Distillery]

We are currently in the process of opening a Distillery in Missouri and have went to our local bank and they are wanting to do a USDA loan. However the loan term in crazy and puts us in a bind in the beginning due to them not really understanding how a Distillery works. Any suggestions?

[MGL]

You won't find many banks giving the loans and terms which the distilling industry requires.

Private funding is your best option.  Give away some shares and get revenue that way. If you don't have any interested parties it shows a major flaw in your plan because there's always some rich person who wants to put his money somewhere.

Funding is the easy and short term problem. Profiting is the hard and long term problem.

[whitemule]

Hey, get in touch with me. I looked at some of your other posts and think I've probably can answer most of your questions in a few minutes. I'm a MO distillery also. 4176585999

[Glenlyon]

Bank vs. investor - is one of those nasty: 'It depends'...

You need to ask yourself at the very, very beginning - am I creating this business to enrich myself and my lifestyle - or - am I building this business to make money for other people?

If you are wanting to enrich yourself - you are establishing a 'founder's based business'. Otherwise, you are creating an 'investment grade business'. So, here is the 'depends'...

If you are creating a founder's based business, a bank loan, although difficult to get - is the better way to go. For one reason - they are predicable. You know the payment schedule, the interest rate and the time frame. As long as you operate within these constraints, you're gold. Your goal as the business operator is to make money. The more money, the richer the happy business owner and paying the loan is no problem. Even if you have a challenging cash flow projection. A clever bank will recognize this and will structure the loan accordingly. How do you find a bank that will listen to you? Don't bother - look for a credit union instead. You will have a lot more luck with less paperwork. That being said, you better present a killer business plan and as much collateral as possible.

I won't get into the complexities of an investment grade business but, I will say in the long run it will be vastly more expensive to operate with investors and their attendant opinions and associated problems. Investors are for bigger companies with a management team that can handle them.

Don't forget,  starting a distillery will suck up cash faster than you can possibly imagine. For example, your choice of window frame color can affect the window invoice by over 30%. Handicapped bathrooms? Who knew? And that's just a few examples. No one thinks of these kinds of things when they are creating the business plan. Banks or investors not withstanding, you need to have your own money one the table and you are going to need a lot. My pico distillery is closing in on $300K and I'm month's away from opening and by the time I do, I'll probably be out $400K+. 

With that kind of a budget, you can fly around the world and amass one hell of an alcohol collection and still have $100k in your pocket. So, consider the dream carefully and double down on the business plan! Make those numbers sing!

I also should add - I operate in BC Canada - where our regulatory system is vastly superior to most American jurisdictions, featuring fewer rules, a better tax system and a clearer road to profitability. Easier for the banks to understand - something else to keep in mind. I guess. 

 

 

 

[nabtastic]

On 10/11/2017 at 12:18 PM, Glenlyon said:

Bank vs. investor - is one of those nasty: 'It depends'...

You need to ask yourself at the very, very beginning - am I creating this business to enrich myself and my lifestyle - or - am I building this business to make money for other people?

If you are wanting to enrich yourself - you are establishing a 'founder's based business'. Otherwise, you are creating an 'investment grade business'. So, here is the 'depends'...

If you are creating a founder's based business, a bank loan, although difficult to get - is the better way to go. For one reason - they are predicable. You know the payment schedule, the interest rate and the time frame. As long as you operate within these constraints, you're gold. Your goal as the business operator is to make money. The more money, the richer the happy business owner and paying the loan is no problem. Even if you have a challenging cash flow projection. A clever bank will recognize this and will structure the loan accordingly. How do you find a bank that will listen to you? Don't bother - look for a credit union instead. You will have a lot more luck with less paperwork. That being said, you better present a killer business plan and as much collateral as possible.

I won't get into the complexities of an investment grade business but, I will say in the long run it will be vastly more expensive to operate with investors and their attendant opinions and associated problems. Investors are for bigger companies with a management team that can handle them.

Don't forget,  starting a distillery will suck up cash faster than you can possibly imagine. For example, your choice of window frame color can affect the window invoice by over 30%. Handicapped bathrooms? Who knew? And that's just a few examples. No one thinks of these kinds of things when they are creating the business plan. Banks or investors not withstanding, you need to have your own money one the table and you are going to need a lot. My pico distillery is closing in on $300K and I'm month's away from opening and by the time I do, I'll probably be out $400K+. 

With that kind of a budget, you can fly around the world and amass one hell of an alcohol collection and still have $100k in your pocket. So, consider the dream carefully and double down on the business plan! Make those numbers sing!

I also should add - I operate in BC Canada - where our regulatory system is vastly superior to most American jurisdictions, featuring fewer rules, a better tax system and a clearer road to profitability. Easier for the banks to understand - something else to keep in mind. I guess. 

 

 

 

Careful Glenlyon, or you'll have all of us moving to CA

[Glenlyon]

22 hours ago, nabtastic said:

Careful Glenlyon, or you'll have all of us moving to CA (Correction - 'BC', Canada)

British Columbia is indeed a wondrous land awash with craft alcohol of all kinds. Hundreds of wineries and breweries and now upwards of 60 plus distilleries live here. For distilling in particular, its quite attractive because if you make an 'artisan' product and sell it directly through the internet, tasting room or farmer's markets we get to keep the provincial alcohol tax. A considerable benefit!! The downside is we have to use 100% locally sourced grains and fruits for fermentation - so, for example - we can't make rum because cane sugar isn't a BC product. But, we could make a 'rum' using honey. Wayward Distillery in Comox is doing something along those lines.

That restriction is a bit irritating but compared against the advantages of our area, its worth it.

Having paid a god awful, jaw dropping sums in loans and interest in my previous businesses - I'm a little down on the loan concept for the distillery start up. That's why I stressed having your own money. If you can get out of the startup phase with as little residual debt as possible, its a lot easier to make some ground. If you are burdened with a loan or investment right out of the gate, its hard to get traction. Especially, when you are trying to get those first critical accounts and the cash flow sucks.

People are easily attracted to the investment idea - or even a partnership concept to get things going. And, its easy to get on this track, because investment money is relatively easy to come by. However, in the long run, I'm sure many, many players on this forum will weigh in on the downsides of investors and partners. Most will probably tell you they regret bringing on the money - because when you're broke, fifty grand sounds great. In the heat of battle, that $50K is gone in a flash and now you have the additional stress that goes with having to cater to that partner/investor and their now historic cash.

Its hard to get started. No question about it. But here is another interesting wrinkle about the BC environment. Once the government gives you a license - they don't want you to go out of business and they make extra sure you run a profitable business - if they think you're going off track, they'll let you know loud and clear. Very cool, when you actually stop and think about it. When I consider how regulated the American system is, I often wonder how people make a go of it - but, distillery business people are a tough lot, driven by thirst

 

[nabtastic]

I'd certainly agree with your general view point on having your own cash over loans/investors.  An investor, in my experience, should be vetted harder than your employees because you essentially have a boss (or manager) that you have to answer to.  If they do not understand the business then it can be an incredibly hard battle to purchase the right equipment in the right timeline for the business.  A bank can be much harder to get on board but that is probably a good thing - you need to be able to at least make it work on paper where as an investor may be wooed simply by an idea. 

LOL to the 50K - it's easily gone in a single bottle order.. 

Hawaii is quite forgiving in many ways.  We producers (beer, wine, and spirits) have a lot less regulations to deal with.  However, the pace of bureaucracy can be maddening and confusing.  How has BC been able to convince the regulators to work with the industry - or are your policy makers more proactive naturally?

[Glenlyon]

18 hours ago, nabtastic said:

How has BC been able to convince the regulators to work with the industry - or are your policy makers more proactive naturally?

In a word - greed. The provincial government makes well over 600 million dollars a year on booze.

However, the real story is a bit more complex. I'll sum it up briefly.

Way back in the olden days (mid eighties) when I was a wee lad of 18 - a local returned from a trip to England. As Victoria, my home town was inclined to sell itself as a 'British' themed place - this local quickly noticed that the English Pub was conspicuously missing. So, eventually, he opened BC's first craft brewery - Spinnaker's. That business is still thriving and they make over 4 million dollars in profit a year out of their original brew house, a tiny, tiny space in an old heritage waterfront building. Shortly thereafter, one other like minded business opened, Swans Brewery - also still operating. After that nothing happened for a long time. With the exception of course that 'we', Victoria's youth, were drinking real beer, not that watery shit that comes from a factory in a can. Which is why today, there is such a deep rooted love for craft alcohol throughout the province.

A couple of years later, we had a crazy Premier leading the province. A real nut job, but he accidentally created the farm-gate wine business when he issued some licenses to a couple of farmers who wanted to be in the wine business Euro style. Small batch, gate sales, etc, etc.

Predictably, their wineries were a hit and pretty soon more piled on. By then everybody was complaining about the system and so the BC government began reforming the alcohol business through de-regulation and by streamlining the application/tax processes. By then they were realizing the vast potential for the craft alcohol business in several areas. It created tax revenue by the truck load and it revitalized small farms, restaurants and other associated tourism activities. The Okanagan Valley here in BC is a fantastic example of how the wine business absolutely and completely transformed the landscape and the economic output of a region.

Eventually, (about seven years ago,) some entrepreneurs went to the government and said, 'Hey, we want to distill spirits.' And, the government agreed, eagerly anticipating even more revenue and so the age of distillation began.

In the end, the system created itself to be very responsive to the industry and although one does have to be patient with the inevitable bureaucracy, it is manageable because everybody agrees, alcohol is a great business to be in - if you can afford to anti up - and therein lays the the catch of course.

[et1883]

distillers seeking investors in the US will want to pay attention to SEC rules and EDGAR - one link here below for exemptions on Form D to allow various types of investors. In some cases, you disclose financials, in other cases not.  as with most government rules, there are penalties for non-compliance, and yes, even if making mistakes and not being informed.  https://www.sec.gov/info/smallbus/cfformd.htm

As the B-school joke goes, your smallest investors will take the largest amount of your time.  experienced and accredited investors know the rules and will leave you alone.  Best is finding accredited investors with industry knowledge and management advisory input to help.  Keeping them all informed is helpful in any case, and they'll be your advocates about "their distillery."

On the British Columbia side, permits are now 4-6 months waiting time.  No new "liquor primary" licenses  (in case anyone wanted to think about just selling craft spirits, and not being a mfg) until 2022.   The craft advantage of exemption from provincial excise tax is a superior opportunity; disadvantage is that it tapers off as you production increases.   And not making rum, that's a downside too - fewer pirate themed products :-)   If your BC firm is properly configured to attract investors, they can benefit from significant tax deduction in the year they make the investment.  That does not exist in the USA.  What does exist for US investors is on the backside of an investment, and US-based distillers seeking investors might want to read up on 1244 stock status in case there is a need.  (http://www.investopedia.com/terms/s/section-1244-stock.asp).

In all cases, YMMV, and none of the above is advice or necessarily complete, just observations obtained in our process.   Defer to the reader which parts are relevant for your experience and needs.   Cheers!

 

[Glenlyon]

Yes, there are excellent tax incentives for (BC) investors through a variety of different programs. In fact with the right approach, BC investors can get upwards of 70% back in taxes/tax relief.

We’ve turned down several offers of substantial investment money for the distillery.

A few years ago we launched an investment grade media project. It was very exciting and there was lots of money around and we were developing some very cool opportunities. However, somewhere along the line, one of the major investors got sidetracked (ego based) and caused the whole thing to come crashing down. It cost a lot of friendships, long valued business connections and money. I’m still angry about it years later. But one must move on.

Since then, its all credit unions all the time.

[GeorgeK]

Hello Glenlyon.  Seems I'm about a year behind you in the Vancouver area.  Any chance of our touching base locally? 

Thanks, George