Since 1997, Magnolia Brewing Co. has been serving San Franciscans its popular craft beer and food at its 3,500-square-foot Haight Street brewpub.
As the years passed and the company’s success grew, so did its need to expand production. That’s why Magnolia decided to open a second location across town, in the up-and-coming Dogpatch neighborhood.
“We had really outgrown the original brewery — we continue to brew there, so it’s not like we moved away from it — but we needed more production capacity,” says Magnolia co-founder Dave McLean.
But the path to growth certainly hasn’t been an easy one. The company went through a long period of permitting and design for the new space beginning in 2011; construction started in 2012 and lasted two years.
Besides a long construction period, another roadblock was financing. Starting a brewery requires large amounts of money up front just to get all the equipment you need to brew and serve beer (and in Magnolia’s case, equipment for food as well). As a brewery grows in size, you need to pump even more money into the business just to meet the increased demand — for example, purchasing larger equipment for additional brewing capacity.
“If you build a restaurant or brewpub, all your capital outlay is up front,” McLean says. “And I’ve seen that as we grow, every step of the way of growth involves more fundraising.”
Tom McCormick, executive director of the California Craft Brewers Association, says that effective financing is essential for new breweries.
“There are two things you need to expand: one is stainless steel, which is expensive, and two, a bigger footprint, and real estate is expensive, whether you are buying or leasing,” he says. “So it’s a constant process of keeping up with growth and with demand, and of course at the root of that is financing to fuel that growth.”
Turning to Bolstr for help
Besides a new 10,000-square-foot space in the Dogpatch, Magnolia’s expansion plan also includes bottling its own beer for distribution. Magnolia is currently available in draft form only (in glasses and growlers), and the beer is distributed to bars and restaurants in the Bay Area and in a few cities in Colorado. But bottles are coming by the end of 2015, which will allow Magnolia’s best-selling beers, such as Proving Ground IPA, Kalifornia Kolsch and Blue Bell Bitter, to reach a wider audience.
To help them accomplish the expansion, McLean and Magnolia Brewing Co. have turned to Bolstr, a marketplace lender that helps consumer, retail and manufacturing businesses raise growth capital from private accredited investors (those with at least $1 million in net worth or $200,000 income).
Bolstr works like this: Small-business owners apply directly on the website. During the application process, the business needs to provide historical tax returns, a balance sheet, a year-to-date profit-and-loss statement, bank statements for the last 12 months, and loan agreements on any existing debt.
Bolstr then runs a financial analysis on the business to determine if it is approved, and if so, how much money it can raise. To qualify, the business has to have at least one year of historical revenue, has to be profitable or near profitability, and has to be looking for funding to invest in a growth initiative (such as buying new brewing equipment that will increase sales).
From there, it’s up to small-business owners to decide whether they’d like to move forward with Bolstr, according to Bolstr co-founder Larry Baker.
“Once a profile is launched in the marketplace, investors can log in and review the opportunity, decide on a deal-by-deal basis whether they’d like to invest in the deal or not,” Baker says.
When a campaign is live, the business owner shares a business summary, answers some questions about the risk factors of the business, and provides historical and projected financials.
A unique repayment structure
With financing through Bolstr, small-business owners do not give up any equity in their businesses. The company calls its repayment process a “revenue-sharing agreement”: In exchange for the funding from investors, the small business repays investors based on a fixed percentage of the businesses’ monthly revenue, until it has met its repayment obligation.
This structure differs from traditional loans, which are typically repaid in fixed monthly installments, and is more similar to how a merchant cash advance works, but at a lower cost, according to Baker. “We’re much cheaper than merchant cash advance; we have the repayment flexibility that is similar to it, but the loans are structured more like a term loan from a cost and duration perspective,” Baker says.
According to McLean, the Bolstr financing was a good solution as the company prepares to expand.
“This round was to really help position us better to move into our next phase: the expansion of ordering more brewing vessels to expand capacity, and primarily lab equipment that can help us ensure quality control as we go,” McLean says. “I did my due diligence and checked out the whole model, and it seemed appealing.”
For Magnolia, Bolstr filled a need for financing outside of typical equity or debt. McLean says Magnolia had used equity financing in the construction phase, and it wasn’t quite ready to do another equity round, as that’s a “big project and something you need to time right.” Magnolia had also taken out a loan and didn’t want to increase its debt burden.
“We were trying to manage debt levels and also maintain equity,” McLean says. “And since we already put together a finance funding package a year before that involved both of those, it kind of filled a nice little middle ground between those.”
McLean said Bolstr actually reached out to him initially, as the company has had success financing other breweries.
“Craft beer in general is actually a great industry for us — you’re talking about a sector that has fairly high margins, it’s a capital-intensive business, and the growth rates are really attractive as well,” Baker says. “With the revenue-sharing agreement, as the business grows revenue, the duration of the payback gets shorter.”
Bolstr makes its money by applying a multiplier to the original loan amount and adding it to the repayment. For example, a $100,000 loan with a 1.15 multiplier would result in the business repaying $115,000. The funds would be repaid based on a fixed percent of monthly revenue until the $115,000 figure is fully repaid (for example, 2% of monthly revenue). The target repayment duration is 12 to 36 months.
“There’s a lot of value in the flexibility of that structure, because a business’s payback is directly correlated to its cash flow profile. So when sales are up, it pays more; when sales drop, it pays less,” Baker says.
There’s also the potential for a quick closing. Magnolia’s investment raise on Bolstr was one of the quickest ever on the platform: It was done in less than 24 hours and funded within three days. And although the loan hasn’t been fully repaid yet, the company is growing very rapidly, according to Baker.
Bolstr also charges a listing fee of $1,500 per campaign, and there are some regulatory filing fees to comply with each state’s Blue Sky Laws, which can cost between $500 to $2,000, depending on how many investors you have and what state you’re located in, Baker says.
What if your business fails and can’t repay investors? In certain circumstances, Baker says, Bolstr will require a personal guarantee from the majority business owners (which makes you personally liable for the debt and puts your credit score and assets at risk), or include some sort of asset security, where Bolstr will take an interest in specific assets of the company. Bolstr’s failure rate has been 0% since the marketplace launched 18 months ago, according to Baker.
“We’ve already had four loans fully paid back, and every single deal we’ve launched on the platform has successfully reached their goal, and they’ve reached their goal within five days, so it’s been a fast access to capital,” he says.
The future for Magnolia
As for Magnolia, the financing came at exactly the right time for the company.
“We’re on a sort of pretty intense growth path right now,” McLean says. “We’re going to be looking to raise more money down the road in probably larger amounts as we continue our expansion, but this is doing a really fine job for what it is right now.”
While the loan hasn’t been fully repaid just yet, it has helped Magnolia expand production and launch its second location, which, in the first year of operation, helped the company beat its projections.
“Bottles are coming by the end of the year, and we’re just looking to expand our footprint and distribute beer in a more thorough way throughout the Bay Area and beyond, by having a bottled product as well as our draft product,” McLean says.
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Images via iStock, Magnolia Brewing Co. and Bolstr.