Weighing up the types of debt finance, or in simple terms loans, that might be available to breweries.
In our article Equity Investment: Time for Another Round, we discussed the types of equity finance that could be used by breweries to raise funds. In contrast, this article will discuss some of the types of debt finance, or in simple terms loans, that might be available to breweries.
Bank loan
The most prevalent form of business borrowing is a term loan from a well-established high street bank. Such loans will generally be repaid over an agreed time period and could be used to bolster general working capital or with a specific purpose in mind, for example to acquire a new brewery site or expensive piece of brewing kit.
The bank is likely to require security over the assets of the business by way of legal charge(s). Such charges will usually grant comprehensive rights to the lender to enforce their security in a default scenario and will also contain covenants and/or restrictions to protect the lender’s interest, which might include requirements for the brewery to maintain a minimum financial threshold and strict reporting and consent requirements to keep the lender up to date on the borrower’s financial position and protect their position. The directors will need to consider whether granting such security might impact their future funding requirements, given other lenders might be unwilling to advance monies if they would rank behind the bank when it comes to security.
The bank is likely to undertake extensive due diligence to assess the breweries’ financial position before credit control can approve the loan offer. On that basis, having your advisers undertake a legal audit in advance can be a useful way to check all relevant contracts, authorisations and approvals are in place for the business so there are no red flags for potential lenders further down the line.
Banks tend to be more amenable to borrowers with assets to pledge as collateral for their borrowing, so owning valuable brewing equipment or having stock carrying significant value which can be ‘charged’ to the bank should give the brewery some flexibility in negotiating the financing terms.
Note: Even if the business does have assets to pledge, the banks might still require security against the assets of the founders, usually in the form of a personal guarantee, in certain cases backed by a mortgage over their personal property. A director considering granting security personally to a lender should speak with a solicitor beforehand to discuss the legal and practical implications of providing guarantees or security for a business loan.
Overdraft
The brewery might simply require a flexible facility that can be dipped into in the case of emergencies and an overdraft could be ideal for such purposes. Banks will usually charge an annual arrangement fee for making an overdraft available to the business, along with charging interest upon utilisation. Dependent upon the size of the overdraft, the bank is still likely to require security so this should be factored in. Similar to a personal overdraft or even credit card borrowing, whilst an overdraft can offer a flexible ‘rainy-day pot’ fund for short-term use, the interest rates charged can be high and the business will want to pay off any overdraft borrowing as soon as possible to reduce overall fees.
Alternative lenders
In recent years, there has been a rise in ‘alternative lenders’ providing finance to businesses that might be unable, or simply do not want, to obtain a traditional bank loan. Such lenders might offer more bespoke terms tailored to the specific needs of a business. The lenders will still assess the borrower’s financial history and projections as a part of their due diligence process and will usually require a detailed business plan, forecasting the financial performance of the business over the next 3 financial years and evidencing that the proposed loan is affordable. Security might still be required for some alternative lenders, but others will forego such protection with the trade-off unsurprisingly being higher fees.
In summary, alternative lenders are likely to charge higher interest, but they might be more willing to lend to newer businesses so this might be an option worth exploring if your bankers are proving unsupportive to a loan proposition.
Conclusion: Debt or equity?
When weighing finance options, it is important to appreciate that no matter whether the business is seeking equity investment or debt finance, the relevant investor/lender is likely to undertake extensive due diligence and it will be wise to address any potential issues before going to market.
Whilst raising monies via a share subscription by investors is likely to be more cost-efficient for the business given there will not, depending on the structuring of the investment, be ongoing interest payments or arrangement fees, the major downside will be that the founders’ ownership is diluted and the investors are likely to take the ‘top slice’ of any profits/capital return in the event of a sale. Institutional investors are also likely to require a seat on the board and certain consent rights relating to key actions so the owners’ flexibility in running the business might be impaired.
The most appealing aspect of debt finance is that the businesses can access funds without the shareholders’ stake in the business being diluted and, in theory, they should have the freedom to continue running the business in the manner they see fit. However, the overall borrowing costs might be off-putting, especially for a fledgling business with little collateral to offer, and likewise any requirement for personal guarantees to be given by the directors might simply be a non-starter.
If you are exploring the different possibilities of raising funds for your business or would like to discuss any of the above generally and would benefit from advice, please do not hesitate to contact Daniel Finn.
