SBA Financing Options for Brewery Expansion

I have been in commercial lending since 2005 and have closely followed the expansion of the craft beer industry for many years. Over the past several years, I had the good fortune to work with several individuals involved in various capacities within the craft beer industry. Throughout my interactions with them, I regularly found myself as interested with the business side of the industry as I was with the beers being created. Given my background as a lender, I thought about how the loan products commonly used by manufacturers could be used by breweries looking to expand. I believe expansion is the point at which a commercial bank is best positioned to work with a brewery. At expansion, the concept has been proven and implementation of a thoughtful capital structure can help fuel growth. SBA Program Overview: Many business owners are familiar with the Small Business Administration in some capacity. The larger question has to do with how the SBA and their loan programs can assist their company. In short, the SBA partners with banks and other lenders through a series of programs to provide funds to privately held businesses operating in the United States. As part of that partnership, the SBA provides those lenders with a guaranty against a loss on the loan in exchange for a fee that is paid by the borrower. That fee can be rolled into the loan request to help reduce the out-of-pocket funds needed to secure the loan. The overall underwriting process for an SBA loan is very similar to conventional commercial loans. The bank will underwrite the recent financial performance of the company in an effort to estimate their future performance. Through that review and consideration of projections, we can calculate the company’s cash flow in order to determine their ability to service both existing and new debt. In order to qualify for an SBA loan, the business must pledge the assets of the company to the loan and all owners with at least 20% equity in the company must personally guaranty the debt. Given that lenders are required to check the personal credit scores of all owners, I am often asked about the role that personal credit scores play in a credit decision. The overall expectation is that the business owners need to be as credit worthy as the company itself and thus a good credit score is expected. As a result, a good credit score will not necessarily improve your chances to obtain a loan but a poor score could put that loan in jeopardy. SBA loans can be used for a variety of reasons but are most commonly used to finance equipment purchases, real estate acquisitions or to provide working capital. Additional uses for the SBA’s programs include acquisition financing or buyout loans. There are a number of resources both locally and nationally for companies interested in obtaining an SBA loan for their business. As a lender, my recommendation is that you work with your existing advisors, area banks and the SBA itself before engaging anyone to help you secure an SBA loan for a fee. Fees to loan brokers can add up and are not eligible to be financed by the loan. If you choose to work with a loan broker, be sure to find out who is paying the fee as some lenders will pay finders fees in addition to ones paid by the business. Should you decide to move forward with an SBA loan for your brewery, the next logical question is who to work with? Outside of finding a partner who you believe would be a good fit, the following are some questions to consider as part of the selection process: •    To the extent you have existing loans, is your current bank an SBA lender? •    This question is important as all SBA loans are required to be secured with a first lien on the business assets. If you have existing conventional loans that are secured with the company’s assets, your new lender may those loans to be retired or combined with the SBA loan request. •     Does my SBA lender have delegated authority? •    Delegated authority (also known as an SBA Preferred Lender or an SBA Express Lender) allows the lender to approve the SBA guaranteed loan programs in-house. While this does not change any of the SBA program requirements, it does give the bank the ability to streamline the process and reduce turnaround time since the SBA does not need to separately approve the loan request. •    Does the lender intend to sell the loan guaranty or keep it within their portfolio? •    There is a secondary market for the guaranteed portions of SBA loans that is similar to the one that exists for home mortgages. As such, some institutions decide to sell the guaranteed portion to investors on the secondary market for fee income. Whether or not the lender chooses to sell the guaranteed portion of the loan should not have an impact on your ability to obtain the loan. Rather, the sale of the guaranty can impose limitations on that lenders ability to amend the loan in the future. If your brewery is seeking a long-term partner for your business, you may want to consider a bank who plans to keep your loan in their portfolio rather than one looking to sell the guaranty. •    Does the lender offer working capital lines of credit? •    This can be important if you anticipate needing a loan to support working capital in the future. Not all SBA lenders offer working capital lines which will limit your business if you find yourself in need of one. Similar to the first point, if you work with a lender who does not support working capital lines, you may be forced to retire or refinance the term loan with another lender in order to obtain the line of credit. SBA 7(a) Loan Scenario: For the first scenario, let’s envision a brewery expanding into a larger…

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