Earlier this week I spoke to a buddy of mine I shall not name but who is opening a brewery in Chicago. You will not find this brewery on any list of up and coming Chicago breweries yet. No, don't ask me for info because I can't tell you. Anyway, this person – I'll call him Mortimer because that's a funny ass name – is in finance mode. He is very actively seeking investors and a bank loan – the exact financing model I'll be using. Well, Mortimer learned this week that the SBA backed loan he applied for was denied by the SBA, meaning they won't guarantee the loan for the lender*. The loan he seeks is only for the purchase of hard assets meaning the brewhouse, fermenters, etc. That's called collateral. As a rule, banks don't like to make large loans to start up companies for intangible things like construction costs. If the business goes sour, a bank can't sell that to recover the principal. What they want to loan you money for are things that can be sold to recover that principal, tangible assets.
The problem Mortimer ran into this week is that when the SBA ran their valuation of the loan collateral, they estimated that the value of the brewing equipment was.....get ready for this.....your government in action....less than the scrap value of the stainless steel it will be made of. Yeah, their underwriters or whatever you call them looked up the value of the brewing equipment in some out of date table and made that asinine determination.
Now, let's do a little test. Go search for used professional brewing equipment. Go on, go Google for a used brewhouse and fermenters. I believe Mortimer is purchasing a 15 bbl system with 30 bbl fermenters, much like I will be doing. Come back when you find those and let me know how much they are. What's that? You can't find any? Wanna know why? Because used equipment is getting purchased within HOURS of being listed on sites such as probrewer.com. It is almost impossible to find used brewhouses or fermenters of any normal microbrewery size, meaning non-nano. So if a craft brewery were to go under, a VERY rare occurrence right now, the equipment could be sold very quickly for almost the same price it was purchased. Seriously.
This is very disconcerting to me. My plan A is based on the fact that I can get an SBA backed loan for the equipment. A loan, I might add, that is quite a bit larger than the one Mortimer is seeking. I do, however, have a few things going for me. First, I am a lender's wet dream. I have a VERY high credit rating, something that is important for small business lenders. I'm not bragging, I'm just old, which helps. Second, other than a mortgage and a small balance on my home equity line (to pay for brewing school and medical expenses), I have no debt. None. Second, I have some assets I can leverage as collateral including my house that I bought in 1999, meaning I didn't purchase during the feeding frenzy leading up to the current recession. The value is still significantly higher than the purchase price, so there's that. I REALLY don't want to do that, but as I've said before, if there is a problem, it will get solved and I will put my house on the line if necessary, with my wife's blessing of course. I'm not fucking around here, remember?
I will be entering the world of bank financing at some point this summer. You can rest assured I will share all that I learn as this brewery progresses.
* Quick primer: SBA = Small Business Administration, a federal agency that, among other things, provides federal guarantees to banks for small business loans. If the business goes under, the lender knows that a large portion of the principal is covered by the SBA. This mitigates risk for the bank which means they're more likely to underwrite the loan. This is especially important for start ups without collateral. The SBA has many different types of programs with many different rules, but it's a great way to start a business.