“To borrow or not to borrow?” That is the question businesses are sometimes faced with during their business cycle.
During the early years of a business’s life, the prospect of having debt and monthly repayments can often seem daunting.
“Should I wait until I have money in the bank?” This is the question that small businesses often ask themselves.
When a business owner has put time and money into a business, which is common for new breweries, managing risk is important. However, before being tempted to stay still, the questions below should be considered:
- If business is growing and I am making profit, can an increase in my outgoings help capture opportunities?
- Do I risk other businesses overtaking me, and does “staying still” become “going backwards”?
- Can I, by accessing funds, improve the efficiency of my business? Whilst my business may not grow sales, lower costs might increase my bottom line.
It’s a good time to review the business plan that you started with or have developed over the years when making decisions about funding.
At this stage a change to your plan may show that finance is beneficial. For example, using finance to create a brewery tap room which allows sales to the public can be a major project.
So, what are some of a brewery’s options for sourcing funds?
When borrowing to source new assets, such as new plant, most businesses opt for Asset Finance, which takes the form of a Lease or Hire Purchase (HP). The finance is secured on the asset, so the perceived risk for a lender is lowered because of the asset value.
HP means the business pays all the VAT upfront, and the purchase is offset against profit in year of purchase via capital allowances. At the end of this agreement, the asset automatically becomes the property of the borrower.
With a Lease the VAT is paid by the lender, and all of the repayments are classified as a cost on your P&L. This makes it 100% tax deductible in every year of repayment.
What option do you choose?
Which choice is more cost effective for you comes down to how large the outlay is compared to your current profits, remaining allowances, and growth plans. End of term ownership implications are different for HP and Leases. You should always seek transparency from any broker or lender on this.
Finance for intangible costs, such as marketing or labour, or assisting cash flow, is more often done as a loan. This is a fixed amount of money given directly to a business. Whereas asset finance is typically paid to the asset suppliers or manufacturers.
How else can you raise funds?
Another way of raising funds for your business is Crowd Funding. This is an increasingly popular method in the brewery sector because the consumer feels more of a link with the business.
There are several breweries who have successfully crowd funded, but the funding platforms do command a portion of your takings. This can be a stressful and time consuming process.
Private equity raises, or government grants, are other ways that certain brokers (Moorgate Finance being one) can assist breweries without using debt.
In conclusion, when you want to raise funds decide what you hope these funds will achieve for you. Identify what level of cost is sustainable and outweighed by the benefit.
Always refer back to your business plan to help you track your growth and changes as a business. Remember to give yourself that pat on the back for how far you have come!
By Bruce Benyon, Moorgate Brewery Finance.