The Quest for Other People’s Money

Posted on Oct 13, 2011

We’ve raised the investor capital we need.  That’s huge.  Now we’re in the middle of the equipment loan process and that appears to be going well.  We started by approaching big banks about an SBA loan.  We’ve been told to select a bank that does a lot of loans with the SBA since they’re familiar with the process.  It turns out that bankers get a fair number of calls from startup breweries.  Several of the banks I contacted started off by firing off a list of questions about the team.  Apparently they get a lot of home brewers with big dreams looking for money and it must not be a recipe for success based on what they’ve told me.  They want a team that has been successful in business before and has good experience brewing in production.  US Bank would not even send us the loan application before they’d had a chance to review our business plan.

There are a couple ways to go with business loans.  Most large banks won’t lend to a startup without an SBA guarantee to cover their butts.  Typically that involves a 7a or 504 SBA loan.  In our case, our loan is to cover equipment which allows us to look at both options.  If you need operating capital the 504 won’t work for you.  Both loan types involve some pretty hefty up-front fees along with personal guarantees from all founding partners with over 20% ownership.  Based on input we had from several bankers, we decided the 7a was probably the best way for us to go.

We were within just a couple days of submitting an SBA loan application when Josh and I ran into a local banker at a wedding.  He’s the husband of our son’s preschool teacher and is a great guy.  After a short conversation we decided to submit the loan to his bank.  So far we feel that it’s been a great decision.  Our banking relationship is much more personal than it would be otherwise and they’ve taken the time to get to know us and our business.

It started with sending the business plan and pro forma and was followed shortly thereafter with a face-to-face meeting.  I walked into the meeting thinking it was an opportunity to explain our business.  In reality it was an interview.  There was a large degree of skepticism going in, but after about an hour of spanish inquisition style questioning, we all walked out of the room with everyone really excited about what we’re doing.

We had put together a detailed financial model of the business with all kinds of assumptions and detail behind it.  The bank had never seen something so detailed before, or a business plan at that level.  We didn’t do it for the bank, but really did it to understand the sensitivity of the business to different variables that we may encounter along the way.  That said, it was a very valuable tool to get the bank excited and confident about what we’re doing.

It looks like we’re going to get around needing an SBA loan and just get a regular commercial loan.  That means lower fees and less red tape.  Plus the bank is actually really pleasant to deal with and really cares about our business.  We’ll be dealing locally with our banking from now on.

We decided on the loan amount based on the level of risk we were willing to assume if the business were to fail.  With personal guarantees, you are on the hook for whatever is left on the loan after the equipment is liquidated.  We picked the number we were comfortable with and here we are.  God forbid that ever happens, but we’re ready for it if it does.

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