Day 511

Forgot about a scheduled test in Sales & Promotion today. It turned out to be one of those tests that requires annoyingly precise answers. “Market share of beer in six-packs rose ____% in 2012.” Whoa. I’d better not forget about the date of the next test or I may be coming back next winter to redo this course.

After the test, more marketing theory. Target demographics. Price points. Attracting the right customers. Alternative marketing. Secondary audiences. Building brands. Brand identity.

In Brewery Management, Mike Arnold brought up the subject of contract brewers. Contract brewers use someone elses’s brewery to make their beer. Should they be allowed to be full members of the Ontario Craft Brewers (OCB)? Currently there is a proposal that a contract brewer could only be a (non-voting) member of the OCB if the beer is brewed at an OCB brewery, and the contract brewer identifies on the label which brewery the beer was brewed at. Needless to say, contract brewers are not very happy with those restrictions.

Mike then brought in two special guests to talk about financing a brewery. First up was Peter Chiodo of Flying Monkeys Brewery to talk about equity financing. This is where you go to your sister and ask her to invest the contents of her RRSP in your brewery in return for a share of the profits (if the brewery ever makes any profits.) You could also ask for an existing building, land, or a lease. (Alas, I do not have a sister who owns a building large enough to house a brewery.)

There is no question that equity is harder to raise than debt. For debt, just visit your nearest bank. For equity, start looking for some people with a lot of money, and learn how to get people excited about your idea.But before you think about taking the easy route and running to the bank for a loan, realize that usually you need have to have some equity to get a loan, since the bank usually wants to secure the loan against assets such as a building, cash or equipment. So even if you decided to get a loan, you may have to find an investor (or two) before visiting the bank.

But be careful! Although investors can’t force you to shut down your brewery, if they become majority owners, they can sell your business to someone else. There are vultures out there with a pot of cash who await opportunities like this. Bad investors will ruin you.

Peter left us with one last thought: Your brewery must grow by at least 15% every year in order to satisfy your investors that they have invested in a vehicle with good cash flow and a good return on investment.

Exeunt Peter Chiodo stage left, enter James McConnell of TD Bank, stage right. James was there to talk about debt financing–in short, asking your bank (or someone else) for a loan.

As always, you can secure the loan by putting up assets that the bank can seize if you are unable to pay back the loan. (Back to Peter Chiodo for a sec: “NEVER use your house as equity!!”) You can also ask for an unsecured loan, but banks tend to look on those a lot more unfavourably (since they have nothing to seize if the loan goes bad). Needless to say, interest rates on unsecured loans are much higher than for secured loans, and the ceiling for an unsecured loan is much lower. (The max for a secured loan at TD is $1.25 million; for an unsecured loan, it’s only $500,000, and you’d better have a good business track record and a blemish-free credit record.)

And then there is the line of credit, which is a kind of floating loan instrument–the bank authorizes you to borrow up to a certain amount whenever you need it, and you are only charged interest from the time you borrow the money to the time you repay it. It is specifically designed to cover the time between when you pay the bill for ingredients and when you recveive money for selling your beer. So if you have to pay for the grain today, but you won;t see a dime from sales of the beer un til March, you can use the line of credit to pay for the grain, then pay interest on the amount you borrowed until your ship finally comes in. It’s a very handy thing for businesses–you don’t have to run to the bank to borrow money everytime a bill for ingredients comes in. Just don’t use it to pay for that trip to the Great American Beer Festival in Denver.

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