By: Jay Avigdor, President & CEO — Velocity Capital Group
Securing funding is crucial in the modern hypercompetitive beverage industry. Without the necessary capital, beverage companies can struggle to fuel growth, invest in research and development, and expand into new markets. Yet, in my experience, many beverage companies frequently tend to overlook some of the most advantageous financing options available to them. Here, I will explain several key innovative strategies to help your beverage company meet (or even exceed) its funding goals.
The Problem with Bank Loans
Securing conventional bank loans is notoriously difficult for beverage companies because loan officers at banks often consider beverage companies a risky investment, and they aren’t entirely wrong. Like most fresh ventures, the vast majority of new beverage companies do fail.
According to CEO and senior Consumer Packaged Goods (CPG) advisor Manoli Kulutbanis, only about 20% of food and beverage brands manage to achieve $1 million in sales. For Coke’s Venturing & Emerging Brands Team, a threshold of $10 million in revenue is necessary to prove a beverage concept, and only 3% of beverage businesses reach it.
Bank loans also require an intense vetting process, which involves a hefty amount of paperwork. Beverage companies are asked to supply a long financial track record, and the review process itself can take months — a timeline that is often all too slow to help businesses when they need it most.
Given these difficulties, beverage companies are often encouraged to seek other sources of funding. The good news is that there is a wealth of options.
Small Business Administration (SBA) Loans
The US Small Business Administration (SBA) offers loans to companies of all kinds, including those in the beverage industry. Since the US government helps protect lenders from some of the risks associated with providing businesses with financing, these loans can be easier to secure than conventional bank loans.
The SBA offers many different types of loans, starting with “microloans” of $50,000 or less that help fledgling enterprises get off the ground. These funds can be used for anything from buying machinery and other equipment to purchasing supplies and furniture, and can also be used as working capital.
Additionally, if you need to purchase a major asset, the SBA 504 loan program provides long-term loans that provide fixed interest rates on amounts up to $5 million. Another program is the 7(a) loan, which gives up to $5 million for a variety of other purposes, including buying real estate, purchasing equipment or supplies, refinancing debt, and facilitating changes in ownership.
While these loans can be a good way to raise funds, it’s important to keep in mind that they do not establish a long-term relationship. Rather, SBA loans are considered one-off financial agreements.
Angel Investors & Venture Capitalists
A few lucky beverage companies have benefited from the largesse of angel investors: people who give capital upfront, usually in exchange for a minority stake in the company or as a loan. A notable example is Liquid Death, the punk-rock-themed Virginia water company with a dark sense of humor, which received nearly $2 million this way.
Venture capital (VC) works slightly differently. While VC firms will grant capital upfront, just like angel investors, they use other people’s money or an organization’s funds rather than their own. Angel investors are wealthy individuals in their own right, whereas venture capitalists are professional financial analysts who identify promising companies to invest in.
It’s difficult to overstate how challenging it can be to secure capital through these means. As Harvard Business Review puts it: “Venture capital financing is the exception, not the norm, among start-ups. Historically, only a tiny percentage (fewer than 1%) of U.S. companies have raised capital from VCs.”
Given these long odds, conducting research is vital before approaching angel investors and venture capitalists. These individuals expect a personal touch, so consider partnering with an experienced advisor who not only knows the relevant investors in your sector, but can also coach you on how to pitch to them best.
Each pitch needs to be carefully crafted with the specific recipients in mind. Make sure not only to cover all the relevant elements of your business plan, but also to frame your venture in the form of a compelling narrative. You should also address any potential concerns upfront, and be prepared to answer tough questions.
Given the high stakes involved, you also don’t want to walk into a meeting with potential investors, only to end up tripping over your words. An advisor can help you practice your pitch and ensure an effective delivery before you take your shot. That way, you can go into pitch sessions with confidence, knowing you’re prepared.
Many websites have compiled lists of angel investors and venture capitalists, including those who support the beverage industry, such as Signal and CrowdCreate. Due to the extensive work involved in every pitch, it’s best to start with those investors whose preferences match your business most perfectly.
The Power of the People
If your beverage already enjoys a following, con sider tapping into the power of crowdfunding. Cannabrew, for example — the CBD craft brewery — shattered its approximately $250,000 goal in less than a single day. The company has announced it will use the funds for outreach to liquor stores and supermarkets to expand access to its products.
Similarly, when soft drink company Square Root wanted to expand from glass bottles to cans, it smashed its crowdfunding target by more than 200%, raising the equivalent of $715,000.
When the crowd believes in your product, this funding method can bring in a welcome infusion of cash, but be aware that these campaigns require a significant amount of work. According to crowdfunding platform Indiegogo, preparing to launch one effectively requires sending out at least 10,000 emails, and that’s just one of their recommended tasks.
Crowdfunding campaigns also need to be used strategically to be successful. Projects should be visually appealing and delineate concrete, easily understandable goals and measurable outcomes. That’s because crowdfunding campaigns often fail if the initiator asks for too much or their content fails to inspire people.
Merchant Cash Advances
The best funding is reliable funding when you need it. Securing this type of capital requires good relationships with the right strategic partners, such as companies that give merchant cash advances.
In my experience, many people misunderstand how merchant cash advances work. When you get an infusion of capital from a merchant cash advance, it isn’t a loan. Instead, the company buys a portion of your future sales, and you don’t part with any of your equity.
Since these companies rely on your future sales for their own revenue, they also tend to be highly invested in your future success. For this reason, businesses like mine aren’t interested in giving startups an advance if doing so would dig them into a hole, like when they routinely struggle to make payroll.
On the other hand, when a beverage company gets an unexpectedly big or time-sensitive order and needs to temporarily surge operations to fulfill it, that’s a good reason for a merchant cash advance. These advances are also good for buying new equipment, renovating or repairing facilities, adding a tasting room, or getting over a temporary cash-flow issue.
Another great thing about merchant cash advances is that they are usually easy to secure. All a beverage company would need to provide, for instance, would be their last three months of bank statements demonstrating a minimum of $20,000 in revenue each month, as well as a FICO Score equal to or greater than 500. This means even new startups can hope to acquire infusions of capital this way.
Merchant cash advances are also fast, so if you’d like to receive money on the same day you apply, a merchant cash advance is the way to go. This means beverage companies — which often have to wait long periods before receiving payment from customers — can use a merchant cash advance to fulfill their accounts receivable in good time.
Take a Long-term Approach
By far, the best approach to successfully funding your company is to cultivate long-term, dependable relationships with partners who will help you when you need it. However, in my experience, building these connections entails a paradox. Lenders, investors, and other sources of funding are usually eager to fund businesses when they are healthy and profitable (i.e. when they don’t need the funding), but businesses often apply for funding when they are feeling some kind of financial strain.
That’s why it’s important to develop your business’s funding strategies over the long term. Applying for capital when your business is strong and they want to partner with you gets your foot in the proverbial door. That way, if you encounter unforeseen difficulties later, you’ll be able to fall back on your established connection with those important investors and financial institutions. Funders often consider your previous track record with them when considering a new request for funding.
Whether you are a craft brewer, vineyard, distiller, or other beverage company, attracting investment will enable you to leverage opportunities and fuel your growth in this competitive industry. If you approach this process wisely, take a long-term perspective, and cultivate relationships with the right strategic partners, then the widest possible audience will enjoy your drinks, and both you and them will be able to relish the sweet taste of your success.
Jay Avigdor is the President & CEO of Velocity Capital Group, a direct funding platform located in Greater New York that funds small businesses nationwide, servicing over 15,000 clients since its founding in 2018. A noted funding expert with a 13-year career, Avigdor has developed an extensive network of over 40,000 relationships with clients and brokers, contributing to an impressive $850 million in sales. His innovative technological approach is setting new trends in the industry by merging finance with technology through automation, thus allowing a quicker and smoother process for merchants and brokers serviced. Avigdor is a graduate of Touro University and currently lives in Cedarhurst, New York.