New bank makes big entrance into Sonoma County beer industry
For those in the craft beer community, it wasn’t hard to figure out the guys over at HenHouse Brewing Co. in Petaluma were going places.
They made a mark in the North Bay by specializing in the quality ingredients that go into their beer, much of it outside the ever popular hoppy India pale ale that is the flagship for most local brewers.
They use biodynamic grain from a specialty Healdsburg producer that goes into their popular saison, even though it costs three times that of traditional grain. The brewers use oysters from Hog Island and hand-harvested sea salt to produce their oyster stout, which was once served at French Laundry, arguably America’s best restaurant. And they get their kegs out the door quickly through their own vehicles to ensure their beer is fresh when it is pulled from the tap rather than wait on a wholesaler to distribute it.
But when it came time for the brewery to expand beyond its 2,000 barrels of annual production, it found the local banking community didn’t share the enthusiasm that could be readily seen at beer festivals and taprooms.
“None of the local banks were interested in our plan,” said Scott Goyne, who along with friends Collin McDonnell and Shane Goepel founded the brewery four years ago and are co-owners. The banks wanted a business that had existed for five years, showing profitability for two years. “They want to see assets you can tie up,” he said.
But HenHouse’s path toward growth was aided by a new entrant into the local banking market, Live Oak Bank. The Wilmington, N.C., bank, which opened its Santa Rosa office in January, specializes in serving craft brewers, wineries and distillers.
“HenHouse is a great company. The fact they couldn’t get a loan from anybody else doesn’t mean that they are a bad company,” said Randall Behrens, a senior loan officer for Live Oak. “Most banks don’t like to lend on projections. ... We were able to see through that.”
Live Oak was able to structure a loan of more than $1 million for HenHouse spread out over 15 years at a low interest rate, allowing the brewery to move on to its next phase: a new facility in south Santa Rosa that can handle an initial capacity of 5,000 barrels annually as well as a new taproom that will also have bottles. It is scheduled to open in the spring.
The loan was made possible by a guarantee from the U.S. Small Business Administration, which backs up to 75 percent of the value. The guarantee allows banks to take a little more risk on a company, but not so much so to run afoul of regulators. The SBA rates typically are prime plus 2.75 percent and the loans go up to ?$5 million, though there is some additional flexibility for real estate loans. They are typically for equipment, expansion, working capital and hiring.
Without the SBA backing, there is too much risk for financial institutions to assume, even for a craft-beer industry that experienced an 18 percent increase in volume in the previous year, bankers say. The SBA program is significant because it allows the bank more flexibility in underwriting so that it can look at future revenue projections, said Tracy Sheppard, a senior loan officer for Live Oak who worked on the HenHouse deal.
“Given the rate of growth in these industries, the SBA program is crucial for a lot of these small guys to get bigger,” said Sheppard. “It would be hard to find conventional banking for young businesses that are growing that fast.”
The SBA program is where Live Oak is gaining a reputation both locally and nationally. The bank, which was founded in 2008 and went public this summer, has become the second-largest national lender under the SBA’s main lending program. The status is remarkable given that Live Oak is a small bank with assets of just more than $1 billion, compared to the bank in the No. 1 spot, Wells Fargo, with $1.75 trillion in assets. Its default rate is less than 1 percent.
Live Oak has centered its business plan on certain verticals that are attractive in small business lending, such as poultry processing, veterinarians and funeral directors. It came on the scene at a fortuitous time when banks were pulling back in the midst of the Great Recession.
The bank was preparing to start a wine vertical but then looked at the space and saw the tremendous growth in both craft beer and spirits and decided to include them into the mix, said Keith Merklin, general manager of the wine and craft beverage division.
“Most banks are not set up like us,” Merklin said. He noted that a community bank may have an officer who will do brewery deals, but he or she is likely off the following week chasing an entirely different industry, whether a small clothing boutique or a self-storage place. Big banks have such specialty divisions, but many small business owners may feel that they will not receive sufficient attention from large institutions more apt to chase the largest deals, he added.