How To Finance A Distillery: Raising Capital Beyond The Bank
March 15, 2019
Do you want to start a distillery? Before you get swept away by the excitement of what products you’ll make and how great they’ll taste, do you know how you’ll fund your distillery business from start-up through the first five to seven years? The spirits industry is not a fast-moving business with quick returns. There’s lots of red tape to cut through, startup costs, and ongoing capital needed to get a distillery up and running — and keep it that way. A loan from a bank is the most obvious, and often necessary, option for distillery fundraising, but more opportunities exist if you know where to look.
Where to Start with Distillery Financing
The first and most important step is to figure out what your financial needs are. Everyone has a different vision for their distillery and varying measures of success, so you need to be clear on your goals and how much money it’ll take to reach them. You can determine your financial needs by developing a financial model.
CONSIDER THE FOLLOWING AS YOU DEVELOP THE FINANCIAL PLAN FOR YOUR DISTILLERY:
- You’ll need to have skin in the game. Regardless of how much money you can raise, be prepared to put up at least 10-30% of the money needed upfront.
- Don’t underestimate how much you will need to spend on marketing. Having a great product means nothing if consumers don’t know about you, and you can’t rely on word of mouth alone. Entering a market and providing support for your distribution channels requires a healthy marketing budget.
- Don’t count on revenue from your distillery to keep you operating for at least a few years. In general, it takes five to seven years to break even.
- Don’t overestimate your cash flow. Just because you have products in the market doesn’t mean you can rely on those sales for immediate cash flow; based on payment schedules, it could be up to a few months before you get paid on the products your distributor is able to place.
- Don’t expect to raise more money once you’ve started. Yes, it is easier to fundraise for a business with a track record of success, but you should plan to be fully funded before opening. Time you spend fundraising once you’ve launched is time you’re not spending running your distillery.
ALTERNATIVE OPPORTUNITIES FOR DISTILLERY FINANCING
Once you have a better understanding of your financial needs, you can begin seeking capital. Aside from the traditional bank loans, you can potentially raise capital through:
- The Three F’s: Family, Friends, and Fanatics – This is the first group you should go to for alternative funding. These are the people who are willing to chip in capital because they believe in you, are excited about the product, and/or want to be a part of the industry without necessarily having to distill anything themselves.
- Grants – Depending on your situation, you may qualify for government funding. One such grant program is the Value-Added Producer Grant by the USDA. If you have a farm or existing land you want to repurpose, you may be able to get assistance from the government to diversify the use of your land. Grants exist in the varying levels of government so be sure to check for:
- Federal Grants
- State Grants
- Tourism Grants
- Local Municipal Incentives
- Equipment Financing – Lessen the weight of starting up by financing new equipment over time with a payment plan.
- Aging Inventory Financing – If your distillery is already up-and-running, you can leverage your aging goods for capital through aging inventory financing.
- Foreign Investment Programs – These programs incentivize investors abroad to contribute capital in exchange for visas and/or citizenship opportunities.
Odds are, these alternative methods won’t fund your distillery entirely but they can reduce the financial burden significantly, especially since they’re often provided at a lower cost than going to a bank with fewer restrictions, lower interest (if any), and/or waived taxes. So whether you’re fully funded or just getting started, it’s worth exploring your options. If you do qualify, great! If not, it’s good practice to inquire, and you still benefit by being better prepared to seek funding elsewhere.