- Business Law
Whereas decades ago traditional sources of capital, such as bank loans, may have been the only option for growing your business, the explosion in popularity of craft breweries and distilleries, coupled with the advent of the internet and social media, has simultaneously expanded the options for funding your operation. Moreover, state and local efforts to revitalize certain areas has resulted in state and local incentives to open or expand businesses in those areas. Below, we discuss at a high level the various avenues available for financing your brewery or distillery, both at the start-up and expansion phases, outside of traditional debt financing, and we recommend you contact us to discuss your options in greater detail when you are ready to take your homebrew or distilling operation to the next level.
- Home Equity Line of Credit
As assets and cash flow are typically low when starting a new business, it can be very difficult to obtain financing from a commercial lender. Moreover, the lending requirements of a small business loan can be exceedingly strenuous. Rather than wrangle with such red tape, often new breweries and distilleries look to a Home Equity Line of Credit (“HELOC”) to finance their business at the start-up phase. A HELOC allows the entrepreneur to borrow against the equity held in their residence, like a second mortgage, or a first mortgage if you use your HELOC to simultaneously refinance your first mortgage.
A HELOC is a form of revolving credit. With a HELOC, you are allotted a certain maximum credit amount, typically equal to approximately 80% of your home’s value minus whatever outstanding loan balance(s) you have on it, and a time during which you can draw on those funds. During the draw period, typically between five and ten years, you are only required to repay the interest that accrues on the amount drawn and are not obligated to make payments on principal. Once the draw period ends, the repayment period begins, typically between 10 and 20 years, during which time you are required to make regular payments against the principal plus any interest accrued thereon.
HELOCs offer autonomy as you are not required to adhere to the strict lending requirements of a traditional small business loan, as well as versatility and convenience as you can draw and pay interest on the line of credit only as needed. Further, some HELOCs can be convertible to fixed-rate loans, which can be helpful if you are borrowing a large sum at one time, which is not atypical when establishing a new brewery or distillery. Moreover, once you have obtained your seed money with your HELOC, you can obtain additional SBA financing to expand, purchase additional equipment, real estate, etc.
There are risks associated with HELOCs. The interest rate is typically variable unless converted to a fixed-rate loan. Moreover, because payments during the repayment period require payments against principal, those payments can be substantially more than during the draw period. Finally, should you be unable to make the required payments, you risk losing your home to foreclosure.
In the last few years, crowdfunding has become enormously popular for funding new business ideas and projects. Getting people excited about your product, developing brand loyalty, and creating interest in being part of your venture can be extremely valuable and lucrative for raising new capital. You should immediately begin cultivating interest, excitement, and loyalty to your product by offering swag and incentives to customers/potential investors, and developing a social media following now as you can use this popularity as a springboard for your eventual crowdfunding, either rewards-based or ownership-based, as discussed below.
- Ownership-based Crowdfunding
The enactment of the Jumpstart Our Business Startups (JOBS) Act democratized the small business funding process by allowing non-accredited individuals to invest in private companies. Depending on the type of offering to potential investors, the Securities and Exchange Commission (“SEC”) promulgated different rules regarding registration requirements, the manner of solicitation or advertising allowed, the standards for disclosures required to be provided to potential investors, the types of investors allowed to invest, the amount of investment allowed, annual reporting obligations, etc. Following the JOBS Act, the securities laws were relaxed somewhat to allow both entities and potential investors greater latitude to explore potential investment interest and options. For example, excitingly, under Title IV and Regulation A+, depending on the tier of offering, corporations, LLCs, and limited partnerships may use internet crowdfunding to raise between $20 million to $50 million per year from any number of both accredited and unaccredited investors, with no prohibition on general solicitation, no requirement to independently verify investors’ income or net worth, and offering nearly all types of unrestricted and transferable securities, including equities, bonds, or bonds convertible to equities. Note, Regulation A+ provides different tiers of offerings, and the particular rules by which you must comply will depend on under what tier your offering falls.
Note, while most people are aware of the existence of the SEC, which provides oversight of the securities industry at the federal level, most if not all states also have their own securities regulations, termed “Blue Sky Laws”, and Colorado is no exception. Thus, in addition to needing to comply with federal securities laws, securities offerors will need to ensure compliance with their state Blue Sky laws, as well.
- Rewards-based Crowdfunding
Essentially, a reward-based model of crowdfunding exists wherein in exchange for a donor’s monetary contribution, they receive some non-ownership-based incentive, such as brand swag (e.g. t-shirts, hats, pint glasses, stickers, or other collectibles) or membership in a loyalty program or club offering decreased prices or other incentives, which simultaneously encourages brand loyalty. Because no ownership in the entity is offered in return for the donor’s contribution, such financing does not run afoul of federal securities laws in their present form.
- State and Local Financing
Some municipalities offer financing options to aid startups, as well as established businesses. For example, the City of Denver Office of Economic Development (OED) provides gap loans in an amount up to 25% of a proposed project’s costs, thereby encouraging banks and other sources of capital to contribute without needing to take as great a risk. Even more, the City of Denver OED can help small businesses considering moving into certain areas the City of Denver is seeking to revitalize to obtain the necessary permits to operate in such areas.
Additionally, with the exception of Arizona, all states, including Colorado, offer Tax Incentive Financing (TIF). Essentially, the state wishes to encourage development or redevelopment in certain areas within the state and incentivizes this by offering aid equal to the amount the value of surrounding property is projected to increase as a result of the area’s development or redevelopment with your project.
It is certainly worth the burgeoning entrepreneur’s time to explore the various state and local incentives available in the area in which he or she wishes to cultivate a new brewery or distillery, and our firm can assist with this research.
If you are considering your options for financing a new brewery or distillery, or expanding one already in existence, we can help. Check our website as we are publishing a series of blog posts discussing the various aspects to consider and address in the brewery and distillery arenas.
Moreover, when you are ready, please contact us at 303-678-0560 to further discuss how we can help you finance your successful brewery or distillery operations.