Brewery Financial Resolutions for the New Year

As we turn the calendar to 2021, it’s time to make financial New Year’s resolutions for your brewery. Financial resolutions may include sales growth, margin improvement, or expense reductions, to name a few.

  However, during the Covid-19 pandemic your most important resolution may be to improve cash flow. During a crisis, the most essential asset is cash, and access to capital. Simply put, when you have access to capital you can stay in business and ride out the financial turmoil.

  Therefore, in the new year, resolve to build a financing plan for your brewery so that you always have access to capital when you need it.

  In this article, we’ll review tactics and strategies to build your brewery financing plan. We’ll cover loan terms, common brewery loan structures, and the details of what a bank will need from you in order to get funding. A complete and well-thought-out financing plan lets you develop alternate sources of cash and capital when emergencies happen. Like right now.

Brewery Loan Terms and Types

  One of the keys to success in business is to have a financing plan in place before you need the money. The financing plan may include a working capital line of credit, equipment line of credit, and commercial term loans. Each loan serves a specific purpose in funding your brewery business.

Here’s a summary of each loan type:

  Working capital line of credit. This is used for short term funding needs, seasonal, or temporary cash shortfalls. It may be open ended, or there may be requirements for re-payment at certain time intervals. For example, the line may need to be paid down to zero on an annual basis. This type of loan is generally secured by assets, such as accounts receivable and inventory, and may require a personal guaranty.

  Equipment line of credit. This line of credit is for specific asset purchases like a canning line, tanks, or warehouse equipment. The line provides for a pre-approved buying ability so that you can act fast if there is an auction on used equipment, for example. The line is open ended, available when you need it, and converts to a term loan which is paid down in monthly installments. This is a useful part of a financing plan as it provides flexibility, ability to act quickly, pre-planning for brewery equipment.

   Term Loan: This loan is secured by the equipment purchased and is paid down in monthly installments of principal and interest. Unlike the equipment line of credit, this type of loan needs to be reviewed and approved prior to funding, so it takes longer to get access to the funds.

A Typical Brewery Loan Structure Might Look Like This…

  In this example, the business has a working capital line of credit of $250,000 and has used (borrowed) $50,000 of this amount. Therefore, $200,000 remains available if future cash needs arise.

The equipment line of credit in the amount of $100,000 has been pre-approved and is available should the business need to purchase brewery equipment quickly. 

  Equipment Term Loans of $100,000 have been borrowed and are related to past purchases. This loan is being paid down, or amortized, on a monthly basis with principal and interest payments.

The working capital and equipment lines of credit can provide access to capital when you need it most. However, your financing requirements may vary, so be thoughtful about what you need now, and may need in the future.

What the Bank will Need from You

  At the heart of any good financing plan is a good financial pro forma. This document will demonstrate your funding needs and ability to re-pay the loans. Moreover, the pro forma shows your lender that you understand what they require to approve the loan. This provides credibility for you and makes the lender’s job easier.

  A typical financial pro forma will present three to five years of projected results. The information is presented in summary form, and shows sales, margins, operating expenses, net income, and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The expected financial results are then compared to the projected payments on the requested loans. This comparison establishes the ability to make the required payments.

  Here’s an example of a summary financial pro forma:

  In this example, the financial pro forma shows a summary of annual sales, margins, operating expenses, net income and EBITDA. The EBITDA is then compared to the expected loan payment to show the ability to re-pay the loan.

Loan Covenants are Promises

You Make to the Bank

  The financial pro forma presents expected financial results and demonstrates your ability to re-pay the debt. In addition, the bank will require regular financial updates to ensure the expected results are being achieved. This is typically done by sending monthly or quarterly financial reporting.

  Further, the bank will require that loan covenants be met. Loan covenants are additional financial promises that you make to the bank. Examples include the debt service coverage ratio and the debt to net worth ratio.  

  The debt service coverage ratio measures how well cash flow covers debt payments. Here’s an example:

• Debt Service (payments on the loan) = $100,000

• Coverage (cash flow or EBITDA) = $150,000

• Debt service coverage ratio = 1.5x

  n this example, the EBITDA of $150,000 is divided by the debt service of $100,000 and yields a ratio of 1.5 times. In other words, EBITDA (cash in) is greater than debt service (cash out) by 1.5x.

  A second loan covenant that is often required is the debt to net worth ratio. As the name implies, this ratio compares the total debt of the brewery to the net worth. Here’s an example:

• Debt = $150,000

• Net Worth = $300,000

• Ratio = 0.5x

  In this example, total brewery debt is $150,000 and net worth is $300,000. For the calculation, debt is divided by net worth, and the result is a debt to net worth ratio of 0.5x.

  The covenant requirements for each ratio will be set by your lender and spelled out in your loan documents. It’s important to understand how the calculations work and measure actual results against the financial promises (covenants) that have been made.

Wrap Up & Action Items

  In the middle of the Covid-19 pandemic your most important asset is cash and access to capital. The working capital and equipment line of credit provide access to cash when you need it most. The financial pro forma demonstrates your cash needs and ability to make loan re-payments.

  A financing plan provides access to capital so that you can stay in business and ride out the financial turmoil. As you set your New Year’s resolutions, consider resolving to create a solid financing plan for your brewery.

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