Brewers finding it easier to access capital

EGNECKOW

February 10, 2014

As the popularity of craft beer continues to increase in the North Bay and beyond, so too have the efforts among lenders to provide expertise and capital for the industry's growth, according to brewers, bankers, advocates and advisers of the craft beer industry.

It is a trend that points toward an increased confidence in the long-term potential of the current craft beer boom, making it easier for both startup and established breweries to attract investors and loans.

"You used to hear the horror stories of, 'It took three banks to get the money I needed.' Now, you have three banks competing to provide that loan," said Paul Yeomans, vice president and leader of the commercial banking team for Argent Bank in Sonoma County.Spotlight on North Coast craft brewing

Read about the leaders of 14 of the largest North Coast breweries in this inaugural report.

Sonoma County alone now has 21 craft breweries, which together with cider-makers and distilleries added $123 million to the county's economy in 2012, according to a recently released map by the Sonoma County Economic Development Board and a groundbreaking study of the sector released last year. Three of those breweries have opened since June, with indication that yet more are in the works.

Demand for those high-end brews has so far left plenty of room for new entrants to the marketplace in California, the largest producer of craft beer in the country. Over 300 new breweries opened in 2012, contributing to a 20 percent increase in production volume state-wide, according to the most recent data from the nonprofit California Craft Brewers Association.

"One of the things I will often ask our members is, 'What are your biggest challenges?' These days, more often than not, the challenge is meeting the demand for more product," said Executive Director Tom McCormick, whose organization represents over 400 breweries in California.

Yet expansion does not come cheaply in the craft beer industry, with upgrades made all the more difficult by intense demand for used equipment, Mr. McCormick said. It is in these conditions that some banks are seeing an opportunity, honing their approach to that industry's nuances while embracing the security of tangible collateral like tanks and other equipment.

"If you go back 10 years, financing would be much more difficult," said Mr. Yeomans. He recalled past efforts by lenders to calibrate their activities for wineries, and that "the wine industry has gone through what the beer and cider industry is now working at."Going 'mainstream'

[caption id="attachment_87380" align="alignleft" width="224"] Richard Norgrove[/caption]

It was 17 years ago that the now Cloverdale-based Bear Republic Brewing Company sought a small business loan backed by the U.S. Small Business Administration as part of a three-pronged startup strategy, aiming to augment that capital with family contributions and a private stock offering, said CEO Richard Norgrove.

Yet despite what Mr. Norgrove said was a meticulously researched business plan, finding a lender at that time willing to finance a brewery and restaurant in Healdsburg proved difficult. The search widened, and ultimately found Mr. Norgrove and his co-owner son of the same name at Truckee River Bank near Reno, Nev. -- then the nation's top SBA lender to craft breweries.

"Within 72 hours, we were approved," Mr. Norgrove said. "When you're going out there to get funding, go out to where people already know your business."

Bear Republic quickly outgrew its Healdsburg brewpub and ultimately added what are now its production and administrative headquarters in Cloverdale, producing around 73,000 barrels -- 2.26 million gallons -- of beer in 2013.

While using profits to fund expansion whenever possible, Mr. Norgrove said that a long-term relationship with Santa Rosa's First Community Bank has proven effective as the company leaves its startup days far behind. The bank is itself the only financial institution listed as an allied trade member of the California Craft Brewers Association, and counted Bear Republic as among its first clients after opening its first office in 2005, Mr. Norgrove said.

"Our involvement really started when we started the bank -- it really is a prevalent industry up here," said Brian Reed, chief credit officer at First Community. "If the craft beer segment can literally double and still be a small part of the overall market, there's opportunity."

"In the beginning, people wanted breweries to fit like wineries," said Mr. Norgrove. "It's only when it becomes mainstream, that's when it starts to change."Capitalization seen as key

While raising startup capital is far from a sure bet, the pressure is on for newcomers to invest more at the onset to gain recognition amid a flood of quality brews, said Ken Dansie, partner and leader of the private company services group in the North Bay for accounting firm Burr Pilger Mayer.

While the barriers to initial entry are small -- a brewer developing his or her craft in the garage, for example -- the move to a production brewery can involve significant lag time before revenue begins to pour in and put major pressure on those who are undercapitalized, he said.

"Let's say you got a 20 barrel system. The moment you get past that capacity, you need more tanks, a bigger brew house, more kettles -- it's capital intensive," said Mr. Dansie, whose firm is also a member of the Brewers Association. "You really have to have the right amount of capital with friends and family, debt, investors. In order to get regular bank financing, you're going to need 18 months of positive cash flow."

In addition to traditional or SBA financing, private investors are also starting to find craft breweries more attractive, he said.

"One of the neat things about Northern California is you have a lot of entrepreneurs, a lot of private capital -- there's lot of people who would like to own a piece of a craft brewery. There's money," said Mr. Dansie, an early adviser to the wildly successful Petaluma-based Lagunitas Brewing Company.

[caption id="attachment_87381" align="alignright" width="224"] Jake Johnson[/caption]

It was in 2008 that Petaluma's 101 North Brewing Company was seeking up to $350,000 in the form of an SBA loan, an unsuccessful effort in the ongoing financial downturn, said co-founder Jake Johnson. The founders instead turned entirely to private money from family, friends and even future clients, and purchased equipment from a downsizing brewery in New York state.

While saving costs by assembling much of the 10,000-barrel-capacity system themselves, capital requirements in the coming years continued to mount, he said.

"Ironically, it wouldn't have been enough," said Mr. Johnson, who estimated costs of around half a million dollars before production began in 2012. "Because we didn't have that huge bank roll to do it all at once, we did it as we went along."

Their timing turned out to be fortuitous, securing a majority of their needed equipment before such items became in short supply. Today the increasingly popular brand is in 400 to 500 bars and retail establishments, with plans to double its annual production to 3,000 barrels in 2014, he said.

"Right now we are kind of at that point where we need a substantial cash injection to grow," said Mr. Johnson, who added that lenders are beginning to take an interest. "It's almost like starting up again, at the point that we're at."

That funding would allow the purchase of more kegs to satisfy further distribution, which itself comes with other expense concerns, he said. Yet achieving that scale is likely to produce enough profit to in turn support its owners, allowing more focus on the company and, perhaps, more growth in the years to come.

"Then you can think about the next level," said Mr. Dansie, describing business models from small-to-large scale. "It's hard to talk about those that have just started and where they're going to go from. Are they going to succeed? Will they just be a Northern California brand? Will they try to go south? Over the Rockies? It's a very interesting question."

Staff Reporter Dan Verel contributed to this story.