Focus, Banking & Finance, and Small Business & Startups

A sign of things to come?

Breweries are gaining better footing in the financial world but getting funded still isn’t easy.

May 16, 2014
| By Pat Evans |
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ElkBrewing
Taylor Carroll and Eric Karns finally opened Elk Brewing earlier this month. Photo by Michael Buck

A sign had hung on the building since 2011.

“Coming Soon/Elk Brewing” read the placard with the massive antlered beer bottle. For the better part of two years, the sign was a reminder that opening a brewery is no easy task, despite the dozens that seemingly pop up every year.

Elk Brewing finally opened May 2 at 700 Wealthy St. SE in a fully transformed building that is a long way from the white block structure it once was. Co-owner Eric Karns has upgraded the facility with walls full of windows, while a 120-person beer garden is on the way.

The brewery is now the eighth inside city limits, but the first to open since The Mitten Brewing Co. opened on Leonard Street NW in 2012.

Karns’ journey has been one of massive ups and downs. He had planned on opening the brewery in 2012 with two partners, but continued struggles led to a separation from that team. Eventually, he found other private investors to help finance the project, including enough support to buy the building.

Karns’ brother-in-law, Taylor Carroll, came on board last spring. The pair was able to obtain more funding and began work on the brewery as the money continued to trickle in.

“It was always a struggle for financing,” he said.

The struggles were largely tied to obtaining capital, which, for the most part, didn't come from banks. Although plans for the brewery never included a kitchen, banks continued to categorize the brewery project under restaurants, which bankers consider high-risk.

“It’s not a small market anymore,” Karns said. “Banks should probably create a new category separate from restaurants.”

Once Elks Brewing had enough private investment —and the building under control —a bank finally stepped in to round out the financing for the project.

The journey to raise $300,000 wasn’t easy, but Karns and Carroll are already beginning to see the fruits of their labor in their first month of operation.

“It still doesn’t feel real,” Karns said. “But to be open — the process finally feels worth it.”

The roadblocks for Elk Brewing weren’t strictly financial; the project was held up for a good amount of time waiting for a liquor license to be passed at the state level. On the positive side, that gave the owners time to address a common issue for newly opened breweries: having enough beer.

By the time the brewery opened, it had brewed about 35 batches using its three-barrel brew system from Greenville’s PsychoBrew and 14 fermenters. That’s more than 3,000 gallons of beer, all IPA, Black IPA, ESB, porter and Scotch ale.

Although Elk had trouble securing bank financing during the three-year process, others in West Michigan have found help from financial institutions.

Allen Cook was recently reading an article in a Grand Rapids publication that mentioned five breweries. As the lead lender relations specialist for the Michigan District Office of the Small Business Administration, he recognized four of them as businesses that had obtained SBA loans.

It’s anecdotal evidence for Cook’s belief that the lending climate for breweries is warming up. He doesn’t have specific data regarding how many loans have gone to Michigan breweries, but it’s considerably more than in the past. The SBA recently released numbers for the past three years showing 420 loans to 322 small breweries across the country.

Cook said it’s not necessarily a sign that breweries are a better investment than ever, but rather that they are matching criteria more closely.

“There’s one basic question: Can they repay the loan?” Cook said, adding that a business plan must demonstrate that “someone has a viable idea, something personally invested, and can show it works.”

Breweries aren’t just paying back their loans; they’re making an impact on the economy — especially in Michigan where it’s a billion-dollar industry, providing nearly 12,000 jobs and $358 million in wages.

With that kind of impact, the government is getting behind breweries, too. Many area breweries have seen help in the forms of tax incremental financing, tax credits, tax abatements and grants from a multitude of governmental departments.

Perhaps the golden example is Founders Brewing Co. in Grand Rapids. After sputtering during its first few years and nearly being forced to close its doors when it owed almost $550,000 to United Bank, it has since received significant help in continuing its rapid ascent into the ranks of the largest microbreweries in the nation.

Despite spending more than half of its history in the red, Founders is becoming a bigger attraction to banks, according to President and CEO Mike Stevens.

Rick Wehner of Brewery Finance, a company that provides financing to breweries for equipment, said he talks to breweries that have gone both routes. Brewery Finance is an independent company using various sources of funds — banks and otherwise — to help breweries pay for equipment. The company is located in Denver but has helped breweries nationwide.

“I’ve heard from some customers looking for money for kegs that they got money from local banks or SBA loans, when I ask them where they got the rest of their money,” Wehner said. “But just as frequently, I hear that the owners have gotten the runaround from the banks and had to go to private lenders.”

Private lenders are helpful, in any case, whether providing full funding or just adding some backing to the collateral, Cook said. But he said the increase in SBA loans is undeniable proof of a trend. 

“Breweries are very popular right now, much like coffeehouses a while back,” he said.

Still, to be funded by a financial institution, the business idea must be viable, and Cook said over the past decade, breweries have continued to show they can be successful with high profit margins.

At one point, a banker had to be the first to step up, take a risk and lend to a brewery, Cook said.

“Whoever is making that first loan is a trailblazer,” he said. “You’re not sure that what you’re backing is something that can make it.”

New Holland Brewing Co. partner Fred Bueltmann told a crowd at a 2012 Association for Corporate Growth meeting, “These aren’t quick-dollar stories. They didn’t look like good investments, and they probably weren’t.”

Twenty years ago, banks were unlikely to say yes to a potential brewer, but those odds have changed now, Wehner said. There is, however, still plenty of room for more bank loans in the industry, he added.

One problem Wehner sees is that he doesn’t think banks fully understand the value of brewing equipment. At the present time, the equipment does not depreciate at a quick rate because so many breweries are opening —more than 400 in 2012, the most recent nationwide data available.

Wehner said although the slow depreciation rate might not hold true forever, the future should stay positive for years to come.

“There are a lot of markets that need to catch up,” he said, adding that even states like Michigan that are ahead of the brewery curve aren’t fully saturated.

Wehner sees an upside to sticking with private investors, mainly because it’s an easier sell.

“People understand it better than the banks,” he said. “Plus, investing in a brewery makes them kind of like a rock star to their friends.”

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