Contract Brewing: How to Start a Brewing Company for Cheap

Craft beer is in the middle of a huge growth period. This $26 billion segment of the brewing industry began to spike in 2012, and hasn’t shown signs of slowing down some six years later. But as budding brewmasters look to start their own businesses, few can afford to invest the amount of capital—usually anywhere from $100,000 to $1 million—to open up their own facility. Without contract brewing companies, few of the craft beer brands we love would be able to get a single can off the line.

Contract brewing is one of the biggest growth areas within the craft beer boom. Contract brewers help new companies make and package their beer, taking on the physical work of brewing beer and leaving recipe design and promotion to their clients. Plus, contract brewers get to keep their fermenters full by making beer for several brands at a time, which allows for faster turnover and more revenue.

If you’re looking to get into the brewing business, but don’t want to take on all of the stress and headaches of building up your own retail-facing brand, starting a contract brewing company might be the perfect fit for you. You’ll enjoy all of the exciting work that goes into making the perfect pint, while working behind the scenes to help your clients get their start in the business.

What Is Contract Brewing?

Contract brewers have been the backbone of the current craft beer renaissance. Most of the brands beer geeks know and love got their start by brewing at facilities that made beer for several companies at a time. From a financial perspective, this decision makes a ton of sense: Breweries are essentially factories, which means that existing locations can easily produce more product for less money. They also help new breweries avoid millions in startup costs, since they don’t need to invest large sums of money just to create their own production lines.

The contract brewing industry was once stigmatized in the beer community as being an inauthentic way for new brands to make their wares. The economy of scale helped change that, as contract brewing helped more brands get their start and, eventually, open their own facilities. Now, some major contract brewers have to turn away business due to a lack of space, which means there may be a demand for more contract brewing services near you to support your local beer scene.

What Do I Need to Start a Contract Brewing Company?

Even if you’re not looking to start a new customer-facing brewery, you’ll still have to account for many of the same foundational investments to get off the ground. This means real estate, equipment, machinery, and raw materials. In fact, you’ll probably need to make an even larger investment, since your business model is rooted in taking on as many contract clients as possible. Here’s what you’ll need, at bare minimum, to get in the contract brewing business.

1. Real Estate

Full-sized breweries take up a ton of space. Some retail breweries and brewpubs can get away with a smaller footprint, but contract brewing is all about scale. You’ll need to find a large factory or warehouse in order to make your contract brewing company profitable. The more beer you can make, the more clients you can take on. All of that boils down to finding a good amount of property at a reasonable price.

A decent-sized contract brewery should be no smaller than 10,000 square feet, depending on how much demand there is in your area. If you want to make sure your space can accommodate more room for fermenters, tanks, and storage needs, you may want to find a location that’s 25,000 square feet or more. Picking the right location early on—even if you don’t fill the space with equipment right away—can help you future-proof your business as you expand.

Make sure to pick a location that is easily accessible for trucks, too. You’ll need to haul in large-scale tanks, fermenters, and heavy equipment on a regular basis. Local roads are likely out of the question, depending on your jurisdiction, so consider large spaces in industrial areas. It’s also helpful to be adjacent to your clients, if possible, so pick a location that’s on the outskirts of a city or region you’re looking to support.

2. Equipment

Contract brewing companies are all about producing high volume beer for as many clients as possible. This means getting as much large-scale brewing equipment as possible, since this will help you accommodate more business and larger orders. But this kind of equipment comes with a price tag—a 100 barrel fermenter typically costs around $30,000, and you’ll need several fermenters just to support more than one brew at a time. That doesn’t even account for brite tanks, grain elevators, hot and cold liquor tanks, kegging and canning lines, or a fully functioning brewhouse (among other expenses).

In other words, equipment is going to cost you a fortune. Most of these items can be bought used, but that will only save you a fraction of your overall equipment costs. Plus, you’ll need to rent or purchase other kinds of machinery, such as forklifts. Be prepared to spend in order to get even the most modest contract brewery up and running.

3. Raw Materials

Buying grain, hops, yeast, and other ingredients is all about volume. The more you purchase, the less you pay per pound. Some contract brewers offer to purchase common ingredients in bulk and offer them to clients as part of their brewing contract. Others may leave it to their clients to come up with these supplies. If you plan to offer ingredients to your clientele, be ready to fork over some major coinage. Hops are often your biggest expense, even when purchasing in bulk. And as your clients’ customers’ tastes change, you may find yourself needing to source exotic (and expensive!) adjunct ingredients to help churn out dynamic new brews.

Contract brewers also provide canning and kegging services for their clients. Not only will you need to purchase equipment to get liquid into kegs and cans, you’ll also need to purchase cans and bottles in bulk. Depending on the distributors used by your clients, you may also need to furnish kegs for them as well.

How to Finance a Contract Brewing Company

Even if you want to start a brewing company on the cheap, you’re still going to have to put up a fair amount of capital to get going. Thankfully, you don’t have to have deep pockets in order to get your contract brewing company off the ground, so long as you know which loans to get.

1. Small Business Administration (SBA) Loans

SBA loans are among the best—and most competitive—small business loan options on the market. These loans help small business owners access financing from larger lending institutions than they’d typically be able to work with, given that most banks are reluctant to take on the risks that come with providing small ventures with financing. The SBA helps make these loans more attainable by guaranteeing up to 85% of the loan’s total, which reduces the lender’s risk that the borrower will not be able to repay the money they’ve lent.

SBA loans come in various shapes and sizes, too. Small business owners can use SBA loans for working capital, inventory and equipment purchases, real estate acquisition, and refinancing debt. Plus, the terms of an SBA loan can range from five to 25 years, which means they’re easier to afford in the long run and take up less working capital to finance all the while. SBA loans also come in a broad amount of sizes, ranging anywhere from $5,000 to $5 million.

An SBA loan could be a perfect option for contract brewing companies, as they allow for the kind of capital requirements that come with getting brewery equipment. Plus, with interest rates well below those of other term loans, SBA loans are a more affordable option for borrowing cash. Bear in mind that the excellent conditions that come with SBA loans make them highly competitive, and are usually given out to applicants who have been in business for several years, or who have good credit either personally or professionally.

2. Term Loans

Regular term loans are an excellent alternative to SBA loans if you don’t qualify for one. Term loans are the most common, conventional business loans on the market. In exchange for a lump sum of cash, borrowers pay interest and fees throughout the duration of the loan’s repayment period. Long-term loans are repaid over one or more years, whereas medium- and short-term loans are paid off within one or more months (or, in some cases, a matter of weeks).

These loans come with less attractive interest rates than SBA loans, but long-term loans from traditional lenders still offer competitive rates. Short-term loans tend to be more expensive in terms of interest, since they’re easier to obtain with poorer credit, and take less time between application and approval. The approval process for long-term loans tends to take longer, and can be more difficult to get for small business owners, but offer more competitive rates than their short-term counterparts.

3. Equipment Loans

Financing your contract brewing company doesn’t have to mean taking out term loans (and offering up substantial collateral to get one). The largest upfront costs for contract brewers is equipment, which means that equipment financing can be a stellar option. Equipment loans provide borrowers with the amount of money required to purchase a piece of equipment. These loans are self-collateralizing, which means that you do not have to offer up something in order to get one. Instead, the lender can sell the equipment in the event that you can no longer make payments.

Equipment loans are perfect for financing brewery machinery because they cover some of the biggest expenditures you’re likely to encounter. You’re only responsible for paying off the total of the loan plus interest, which means you can free up more of your cash flow for other necessary purchases. Plus, credit requirements are lower than other loan options, since the bank has a lesser risk of not recouping their money should the loan go sour.

4. Business Line of Credit

Brewing is a capital-intensive business, which means you’re likely going to need extra help paying for routine expenses and upgrades to your facility. A business line of credit is uniquely suited to help with these kinds of endeavors—you’ll get access to a pool of cash from which you can borrow repeatedly for as long as the line of credit is open. You’ll only pay interest on the money you’ve borrowed before it’s repaid, and you can draw from the account as often as you need.

A business line of credit is ideal for companies that are already up and running, since they’re not particularly suited for big, long-term investments. They’re similar to credit cards insofar as they provide you revolving access to cash when you need it, without having to apply for several loans every time you need to access financing.

5. Invoice Financing

If you’ve gotten your contract brewing company off the ground and need periodic access to cash between client payments, invoice financing is for you. Invoice financing lets you borrow a set amount of cash against outstanding payments due to you. The lender will give you up to 100% of the value of the invoices provided as part of the loan, and charge you interest in exchange for an advance against the total sum. This can be a great way to turn your outstanding balances into steady cash, so long as you can stomach the terms of the loan in the long term.

The Bottom Line on Contract Brewing

Contract brewing can be a great opportunity to break into the brewing business without having to deal with things like marketing, packaging, and promotion. You can focus on getting down to business making great beer for clients, all while taking on several clients at once. Plus, you’ll be helping new brands get their start in the industry, and create intriguing new brews at the same time. Of course, contract brewing is a cost-intensive business, but there are plenty of financing options to help you get up and running in no time.

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from Fundera Ledger https://www.fundera.com/blog/contract-brewing/