Jack Moir: New ways to fund spirit of the times

This past year has seen a significant rise in demand for artisan spirits in the UK coupled with the rapid growth of distilleries. In 2017 alone, HMRC reported the opening of 49 new distilleries, 20 of which were in Scotland. Distillers starting out in the market are seeking funding via both traditional and more innovative financing models. There are several options for distillery start-up funding in Scotland and throughout the UK, each with its own advantages and disadvantages. These include grant funding, bank funding, private investment and crowdfunding.

20 new distilleries opened in Scotland in 2017, including the Falkirk Distillery in Polmont. Picture: Michael Gillen

Grant Funding: Both the UK and Scottish Governments are generally supportive of start-up enterprises, with a number of schemes available. Scotland’s strong focus on food and drink means there might be access to sector-focused support. Assistance may be available in the form of Scottish Enterprise grants, food processing, marketing and cooperation grants, or from awards such as those from Scottish Edge.

Bank Funding: While early-stage businesses may lack the trading history or demonstrable profitability to make them appetising to banks, certain banks are particularly active in lending to the distillery industry, and can commit to providing funding for small start-ups, all the way up to new large scale distilleries. This sector lends itself to loan facilities based around invoice financing or stocking facilities so there are flexible funding solutions available.

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As you would expect, any bank will need to see an in-depth, detailed business plan when considering any funding application. Banks are also interested in the experience of individuals involved, so past success in the industry and useful connections will be advantageous when seeking funding. You should be prepared to grant security over the assets of the business; most banks will require security over any land and buildings owned by the business as well as a floating charge covering its stock and other assets. Given that stock will be a key asset of the business, regular stock valuations are also likely to be a requirement.

Jack Moir is an associate in Brodies banking team.

Private Investors: Private investors can be a source of either short or long-term finance for a start-up distillery and can be helpful in providing a large injection of cash to a business in the early stages of development. Government incentives such as the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme provide tax advantages to investors to encourage provision of venture capital to start-ups and small businesses, making this a potentially attractive source of funding for both start-ups and investors.

Private investors can also be invaluable in terms of providing guidance on raising additional funds, and managing the business side of the venture. The involvement of a high-profile investor can open doors to opportunities and also make the business more attractive for further private investment. Of course, in return an investor may demand a substantial stake in the business. They may have goals and ideas that conflict with your own, so you have to be sure you are willing to give up a portion of equity.

Large drinks companies, such as Diageo through its Distill Ventures Scheme, have now become involved in investing in new distilling ventures and this may also be a useful funding option to explore.

Crowdfunding: On the face of it, crowdfunding is a very attractive solution to raising funds for a distillery start-up. It enables you to access funds without necessarily giving up equity and may assist in establishing a customer base for your product. A burgeoning area, fuelled by new digital platforms, it can take the form of equity or term debt or increasingly more diverse products, such as invoice discounting. Reward-based investments have been used to some success in this sector.

While there have been failed attempts at securing crowdfunding for distillery start-ups, there are some notable success stories, most of which are new ventures by experienced individuals with connections in the industry. A recent success story is the Holyrood Distillery which raised circa £5.8 million by way of crowdfunding and a further £1.5 million from the Scottish Investment Bank.

Jack Moir is an associate in Brodies’ banking team