As craft beer wades through the COVID-19 crisis, the search for funds in all forms is more important than ever. While brewers hustle to find new revenue streams or help from Uncle Sam, others are also pursuing funds from traditional sources to help them persevere.
But COVID-19 has made it harder than ever to get funding. And some seemingly helpful emergency steps can make it tougher to secure dollars down the road. How to avoid the funding pitfalls of this surreal health crisis? Here are tips to help you keep your brewery out of the financial emergency room.
The downside of deferrals. Numerous lenders and vendors have compassionately (and wisely) allowed brewers to defer payments. With so many unknowns at the start of the pandemic, it was wise for brewers to get as many as they could get. But deferrals can hamper your borrowing future. If you aren’t making full payments to current creditors, it can be hard to qualify for a new loan, lease or financing.
Credit checks can be detrimental. Due diligence is a valuable step when looking for funds. But what seems like smart work to get the best deal may cost you in the long run. Why? Multiple credit checks on your credit bureau can decrease your credit score and make you look desperate for money. Do your homework, but don’t apply with everyone who offers help.
Fewer funders, fewer approvals. As soon as COVID hit, many banks and lenders stopped lending to breweries and brewpubs. So the options for funding are far more limited now. Plus, the already low approval ratios for breweries has dropped like crashing yeast. And to get to “approved,” banks are likely to want big collateral (your home), a blanket lien on your business assets, and tax returns and a personal financial statement, too.
PPP and EIDL rates are AWOL. Uncle Sam provided historically low terms to those lucky enough to get PPP and EIDL help. Don’t get used to that. Commercial lending is risky and creditors price their offerings to compensate for the risks. With 20 percent of small businesses failing in the first year and about half failing by the fifth year, lenders won’t match the rates (or the comfort with debt) of our leaders in Washington.
Higher fu#*ing standards. Because the pandemic impacts key ratios that banks use to approve credit — such as a brewery’s net worth, net profit and net income — it’s now much tougher for breweries to qualify for funding. (Yes, it’s hard to hit the old marks with just to-go sales.) This could negatively impact your current lender relationship and jeopardize future financing through traditional sources.
Meet the “COVID Statement.” Most non-traditional lenders now want to see complete bank statements from several months and something new: a COVID Statement. It sports a new line of questions, too. How has COVID impacted your business? What is your crisis plan if there’s another shutdown? Have you taken PPP or EIDL loans? Are you tired of these questions? (Okay, the last one’s a joke.)
Creative flexing for cash. Many brewery owners will have damaged credit after the COVID dust settles, and it’ll make it even harder to get financing. So be prepared to get creative in finding funds. You may have to provide more collateral, find an additional guarantor, or have to accept a higher cost of funds to compensate for a lower credit score.
A-C-T-I-O-N. In these tougher times, an active role in repairing and maintaining your credit can protect your future. Stay in touch with your creditors and have candid conversations about your situation. Monitor your credit bureau, keep unnecessary inquiries off of your score and limit revolving debt.
Wise gear is a plus. With craft growth slowing, banks are less likely to fund equipment for expanding brewing capacity. Today, equipment that improves brewery efficiency, raises beer quality or creates a point of distinction from your peers (hello, enviro-friendly technology) is more likely to get approved.
Best ROI for PPP or EIDL. We’ve seen breweries use cheap government money to invest in people and new equipment, and pay off debt. For an existing loan, those dollars can pay off the principal and take advantage of the low interest rate. For leases, federal money can put brewers in a stronger position to negotiate a better payoff benefit with a lender. Yes, you’ll pay interest on top of interest. But you’ll spread the balance over a longer term and a lower rate, and that can help your cash flow.
Good luck with these tricky times and the changing new normal. May your funding efforts be fruitful and your brewery and financial picture remain healthy.
As the nation’s first craft-focused brewing equipment lender, Rick Wehner thought he’d seen it all since launching Brewery Finance in 2005. With the arrival of COVID-19, he no longer thinks that. Brewery Finance has provided nearly 1,500 startup and established brewers with vital funding, and Rick’s methods for finding brewery bucks are almost as creative as indie brewing. A proud Colorado native and resident, Rick believes in craft beer, Colter Wall, good horses and the healing power of a honkytonk.