ROCKFORD — When Seth Rivard and his partners opened Rockford Brewing Co. in 2012 along the White Pine Trail about 15 miles north of Grand Rapids, they turned to a federal lending program that backs bank loans for small businesses.
Five years ago, banks considered the craft brewing industry as a type of specialty restaurant, not a beverage manufacturing company that often has a consumer-facing operation, Rivard said. As such, banks typically tended to pass on lending to the industry.
“At the time, they said it was kind of a restaurant industry, it feels like, and that’s much higher risk than the typical loans banks give manufacturing or even other forms of retail,” Rivard said of the initial U.S. Small Business Administration loan at Rockford Brewing. “It was an obvious choice for us. Frankly, I don’t know that we could have gotten a loan otherwise.”
Banks’ view of the craft brewing industry just a half-decade ago led many, like Rockford Brewing, to turn to the SBA’s 504 lending program that’s geared to backing credit for capital-intensive industries and mitigating banks’ risk.
Lending institutions have since warmed to the industry, particularly given its strong track record and growth. However, emerging concerns about market saturation now have some lenders taking a harder look at credit applications from microbreweries.
“It just seems like they’re everywhere,” said Joel Rahn, regional president in Grand Rapids for Midland-based Chemical Bank that counts a number of craft brewers among its clients.
“The level of competition is starting to make it difficult for new operators to squeeze into that space,” Rahn said. “Ten or 15 years ago, there just weren’t as many as there are today, so it was easy to see where the demand was going to come from. But just like any industry, if you have numerous competitors all trying to get their share of the market, that obviously makes it much more difficult for a new company to get established.”
That difficulty can come from geography for microbreweries that serve on premises, Rahn said. He cites the concentration of three breweries on Grand Rapids’ northwest side that are located in close proximity to one another. That raises the question of how many a given market can support and makes lenders “a little more selective” when they see a market concentration.
“It’s almost as if you have to look at it neighborhood by neighborhood if you’re talking about the microbreweries,” he said.
Craft brewers that distribute to retailers still have room for new players and expansion of existing operators, “but you have to look a little harder as to where is that market opportunity,” said Rahn, also noting that ever-changing consumer tastes can disrupt any industry’s growth.
Chemical Bank has not altered its market posture toward the industry or its underwriting practices, although “you have to be a little more cautious just given the overall number of participants,” he said.
One popular option for craft brewers has been the route that Rockford Brewing took: a loan under the SBA’s 504 lending program.
Craft brewers are drawn to the 504 program because of its fixed-rate terms for up to 20 years and low down payments. Banks like using the program because it mitigates their risk.
SBA-backed 504 loans require the borrower to put down at least 10 percent for an expanding business, and 15 percent for a startup. A bank or other lender provides 50 percent and a local certified development corporation contributes 40 percent.
But even craft brewers’ applications for 504 loans are getting a little closer look these days at the SBA level.
“The market is getting saturated,” said Julie Parker, executive director of the Economic Development Foundation in Grand Rapids, a certified development company that coordinates 504 lending and performs the underwriting on applications to the SBA.
The Economic Development Foundation counts 11 craft brewers, taprooms and distilleries in its existing loan portfolio and has a couple more “in the works,” Parker said. That includes working with 7 Monks Taproom in Traverse City on an SBA-backed financing package through Traverse City State Bank for its new location that opened last month in Grand Rapids.
Lenders are not necessarily steering away from the industry, but instead are diving deeper into areas such as revenue and cash flow projections. If a craft brewer is not selling directly, for instance, it needs to detail whether it has distribution agreements in place and how it will access retail shelf space that’s “so hard to come by these days,” Parker said.
“We’re really going to want to dig into those projections and make sure they’re better than average,” Parker said. “The questions are the same. It’s just to what level are they meeting the norm.”
Despite concerns about market saturation, craft brewing remains a “pretty hot” sector for lenders that work with the SBA, said Mark Williams, president of the Lansing-based Michigan Certified Development Corp. that handles 504 loans.
“We’ve seen a consistent appetite from the industry,” Williams said.
The MCDC’s past clients include working on financing for New Holland Brewing Co.’s $1.6 million expansion in 2014.
Parker, of the Economic Development Foundation, believes the emerging question about market saturation for the industry could result in more banks wanting to use the SBA’s 504 program to mitigate their lending risk.
“It really puts the bank in a better position,” she said.
Rivard at Rockford Brewing acknowledges that SBA loans come with considerable red tape, but said the access to capital was worth it in the end.
“If you’re trying to do it alone, it’s going to be a nightmare. There is a lot of red tape, absolutely,” he said. “But if you get the right team behind it, (the process is manageable). You’ve really got two layers of red tape. You’ve got the government red tape and you’ve got the bank red tape. There’s a lot of background checks, personal financial statements, credit checks, things to sign and guarantees. It’s substantially more work than a mortgage, that’s for sure.”
MiBiz Editor Joe Boomgaard contributed to this story.
