”To borrow or not to borrow?”
That’s the question many businesses are 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?” That’s the question small businesses often ask themselves.
1. If business is growing and I am making profit, can an increase in my outgoings help capture opportunities?
2. Do I risk other businesses overtaking me, and does “staying still” become “going backwards”?
3. 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. Bruce Gary, of the Bristol based brewery Left Handed Giant, recently outlined at the London Craft Beer Festival his plan of selling 75-80% of beer straight to the end drinker. The higher price and margin this offers clearly has a potential benefit that outweighs the cost.
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). Because the finance is secured on the asset, the perceived risk for a lender is lowered because of the asset value.
With HP 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, making it 100% tax deductible in every year of repayment. 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. I.e. a brewery with a small profit planning a very expensive new purchase or bar may be better leasing their purchase, but a highly profitable brewery adding additional CTs may opt for HP if they have allowances left. End of term ownership implications are different for HP and Leases, and 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. These finance products can be mixed to achieve the flexibility required on an expansion project. Asset finance tends to attract lower rates than loans as they pose less risk to a lender.
When you have significant trade sales routes, and the time between cost and return due to payment terms causes a strain on cashflow, invoice finance may offer a longer term solution. Invoice finance releases a percentage of the funds due in an invoice to the business, at the point the invoice is raised.
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, and apart from giving away part of your business, there is also risk of what can feel like a rather public failure if funding isn’t achieved.
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, and identify what level of cost is sustainable and outweighed by the benefit. Refer back to your business plan to help you track your growth and changes as a business, and give yourself that pat on the back for how far you have come!
Moorgate Brewery Finance
01908 92 62 62 / email@example.com