By Patrick McCarthy
For the Oregon Beer Growler
Given how intensely expensive a brewhouse is, brewery operators face the tough question of whether to purchase or lease new equipment. Balancing cash flow and cash reserves with the projected return on capital equipment investment will help you reach that decision.
Key questions include:
—What equipment investments offer the best value for short- and long-term savings?
—When does it make more sense to rent equipment?
—Can investment in equipment solve the pinch point in production?
—How quickly will additional equipment pay for itself?
When evaluating whether to buy or rent equipment, factors such as the projected life of the machinery, its value as used, and ongoing relevance as the brewery expands must also be considered.
The goal for nearly all breweries is to be relatively free of debt and produce a strong internal cash flow. Unless the brewery ownership team funds the business directly with contributed equity or existing cash flow is sufficiently strong, some form of borrowing is usually required.
Financing Equipment Rental or Purchase
Typically, banks and leasing companies provide this debt capital for credit-worthy borrowers. Equipment is financed, usually on five- to seven-year loans or capital leases. With these debt structures, the brewery holds title to the equipment and makes fixed payments during the stated loan/lease term and has title to the equipment from the beginning. These forms of debt financing are a tried and true formula that remains the primary approach to brewery equipment debt financing today.
An alternative is an operating lease. Think of an operating lease like a two- to four-year auto lease where the car/equipment is returned to the dealer at the end of the lease term or is purchased at a fair market value. The leasing company owns the equipment throughout the lease term, unless sold to the lessee at the end. Advantages of this approach include: a) much lower capital investment into equipment that is generating strong revenue and profit margin to the brewery coupled with b) the ability to use equipment for a short term with the flexibility to return, replace or buy the equipment in the future. The return on investment dollars (security deposit and monthly operating lease payments) is much greater in an operating lease scenario as monthly operating lease payments are typically lower than equivalent loan or capital lease payments and required down payments.
While not applicable for all business arrangements, an operating lease can be a good fit for a brewery, cidery or winery that is: capital constrained, leveraging investment dollars for rapid growth, or has short-term plans for the equipment.
Patrick McCarthy, Manager
Practical Fusion Capital, LLC