Put your best foot forward to increase your chances of securing the loan you need.
It’s a terrific challenge to have: Your craft beverage sales are growing and you need to boost production, which means you need more equipment. Expensive equipment. It’s time to think about bank funding.
Of course, you can’t just walk into any bank and expect them to hand you money; you have to convince the lender that your beverage business is viable. How do you increase the odds that a bank will approve your loan request? Following are 7 steps I’ve learned from experience.
Step 1: Prepare Your Business Plan
First and foremost, a bank will need to examine your business plan. If you have one, polish it up. If you don’t, it's time to brush off your computer and write one.
Step 2: Organize Your Records
What else do you need to do? Be organized. Organize your financial records, employee records, rent and equipment records — anything you'll need to talk with a bank to discuss building your business. When you must raise funds, preparation is key. Because loan officers want to loan money, they are going to help you through the process. The underwriters behind the loan officers are trying to keep the loan officers in check and if the purchase is large enough a loan committee or board approval might be necessary.
Step 3: Choose the Right Bank
Begin the process by approaching a bank that is the appropriate size for your company. Start with the bank with whom you currently work; because they know your business educating them is minimized. With craft beer’s high growth rate, finding a bank interested in this industry should not be difficult. Bankers like to mitigate as much risk as possible while earning a competitive rate.
Adhere to the open-book policy with bankers. If they feel comfortable with you and all of the information is provided, you should obtain a better rate or decreased covenant coverage than if they have an incomplete story. Remember that whatever you do, in the craft beer industry it begins and ends with the quality of your product. Make a plan for yourself that any spending that you incur should be used to maintain or enhance the quality of your product and brand image.
Step 4: Write a ROI or 12-Month Forecast
Next, write up a return on investment (ROI) calculation or a 12-month financial forecast (after the installation of the equipment) to help the banker understand your expected growth. In general, you should use a ROI calculation for replacing equipment and for an expansion project, use a 12-month forecast.
Step 5: Develop a Capital Expenditure Budget
You must also have a capital expenditure budget for each calculation. The budget should include more than simply the installation and equipment cost. Think about other expenses, such as taxes, training, finance charges, and downtime charges (what will employees do if a key piece of equipment is down for four weeks?).
Step 6: Update Changes in Revenue and Expenses
Next, you'll need to calculate changes in revenues or expenses. For an expansion, use reasonable sales growth assumptions supported by as much analysis as possible. Generally, your profitability decreases as your geographic sales footprint expands away from your brewery. Present your capacity levels for the last 12 months and work with your distributors to gain information on their growth estimates for your brand in the next 12 months.
For changes in your operating expenses, calculate the savings from the project and increases in expenses. Go through your profit and loss statement and think about the impact of the project to each line item. Will the project increase or decrease labor charges, raw materials utilized, plant space used, utilities, insurance, and the like. Remember to recalculate depreciation and include the increase in your product costs.
Step 7: Write an Executive Summary
Summarize all of this information by writing a simple executive summary (one page or less) with the 12-month forecast as the second page. Because appearances help with first impressions include your logo at the top of the page. Components of the summary should include:
- history of your company;
- description of the equipment;
- benefits of the equipment or expansion;
- loan amount requested, and;
- highlights of the financial forecast.
If you can, present this information with an onsite tour of the facilities, because it is important for the loan officer to see the existing plant and equipment. If that does not work, then bribe him or her with a beer. After all, who can say no to a great craft beer?