Brewers'

loot Brewers could well be a wiser betthan banks for borrowers lookingto finance their pub business.

Independent consultantJohn Boardman reports All the major UK brewers have granted loans to customers to finance their businesses.

This activity has been going on for many years and grew quickly in the late 1980s and early '90s.

Accounting standards have changed since the days when brewers were able to use banks to fund a large loan book.

It is estimated that as much as £500m is outstanding to the big national and regional brewers from their loan customers.

These sums have been falling as brewers have been more selective, UK interest rates have fallen, and banks have recovered their appetite for the sector after the recession of the early 1990s.

As an example, Carlsberg-Tetley's loan book fell by two-thirds between 1994 and 2000.

Loans policy All the big brewers are now much more selective about who they grant loans to.

For example, Carlsberg-Tetley potential loan customers need to demonstrate experience in the trade and be able to input a proportion of the overall cost of any project.

Most brewers have tended to steer away from lending large amounts, more than £500,000, because the bigger loans to multiple groups tend to rely on leasehold security and have a history of not hitting the forecast barrelage.

However, brewers are more likely to take a view about loans secured by leasehold property.

Lending against leasehold security is riskier and the quality of the freeholder and the terms of the lease can vary enormously.

Most of the big brewers, including Coors and Carlsberg-Tetley, have recruited bankers to run their loan activity and tried to balance the skills needed to understand the licensed trade with those required to analyse loan proposals within their teams.

Regional brewers tend to vary, but some, like St Austell, are keen to use loan funding as a means of securing existing customers' trade.

Each loan is expected to generate at least the levels of throughput that were forecast when the loan was approved.

When I joined Carlsberg in 1994, the average loan was generating around 60% of the volume forecast when the loan was approved.

This figure is now much closer to 100% because of attention to the issue, better forecasting and early identification of problems.

The level of beer discounts has escalated in recent years, putting pressure on brewers to recover costs if the loan customer fails to honour the purchase obligation.

This has led to the loan documents including the right of the brewerto recover liquidated damages.

Carlsberg introduced such provisions into its agreements in 1996.

Very shortly, none of the national brewers will own pubs.

Therefore, they are no longer obliged to grant a "guest ale" provision and can include a commitment to purchase wines, spirits and soft drinks in their contracts and expect 100% of drinks supply.

This has the benefit of providing a "one-stop shop" for a complete drinks service ­ one supplier giving one invoice and one delivery and the non-beer purchases can count towards a purchase commitment.

Benefits Brewers should have an advantage over other lenders, such as banks, because they understand the independent pub trade better.

Their interest is selling beer, so providing that beer bills are paid and loan and barrelage commitments are honoured, brewers are very unlikely to recall the debt because their enthusiasm for the sector disappears.

I cannot remember one customer at C-T whose loan was recalled, unless the customer broke the agreement in one form or another.

Banks, and especially venture capitalists, may be more fickle in their approach to the sector.

Regular brewery staff visits should facilitate discussion about problems before they grow too big to handle.

The brewers may take more risk than banks in order to get their products a wider distribution.

Set-up fees and interest rates may be lower than banks offer.

For example, at C-T, there were no arrangements fees, which were seen as a deterrent to new loans.

However, early redemption fees were introduced to protect future supply from the fickleness of the market.

Types of loans Repayable loans usually require a monthly capital repayment based on a 10-year term.

Interest can be at a variable rate, linked to the bank base rate, or at a fixed rate (less common).

Advances of barrelage discount loans are non-repayable and are usually at 0% interest.

The loan balance is reduced by each barrel of beer/drink purchased.

For example, a 10-year loan of £100,000 would need a commitment of 500 barrels to be purchased each year and a write-off sum of £20 per barrel to make sure the 10-year term was not exceeded.

Some brewers have schemes with banks that enable the bank to advance the funds and the brewer takes part of the risk.

Tips for licensees For the licensee, here are some pointers to getting the right deal and the funds in place in time for the project to go ahead: l Find out which brewers are keen to lend money and set out to them the criteria on which you will make your decision, eg, brands, service and price l Don't try to hide bad news ­ such as County Court Judgments ­ it will be found l Ask your financial adviser to review the brewer's proposals and see what it means for your business l Lenders will require a professional valuation of any propertyused to secure the loan.

You will probably be paying for this valuation, so make sure you get a copy l Appoint a solicitor who has knowledge of the sector and the brewers' documents.

It will speed up the process.

For example, C-T has a panel of lawyers.

If you choose one from the panel who is not acting for C-T on your transaction, you should get good service and experienced staff, enabling everything to happen faster.

Obligations From the licensee's viewpoint, there are several key things to look out for in the legal paperwork: l Commitments to buy product volumes that are unrealistic l Higher rates of interest in the loan agreement for failing to make payments on time l Higher rates of interest and other costs for failing to purchase the agreed volumes l Granting of security over the pub or other property.

Licensed property can be repossessed if a loan secured on property is in default l Beer supply terms that make the loan deal too expensive, compared to borrowing the funds from a bank ­ if it is willing to lend l "Letters of intent" from brewers.

These mean very little because the brewer's management have not approved the loan yet.

Most brewers are unlikely to want to change their standard documentation.

It is important to have the face-to-face discussion with the brewer to ensure both parties understand the obligations before signing.

Quick funding Obtain a list of all the information the brewer will require up front.

At C-T, a checklist is set out on the sales person's laptop.

Provide that information in a timely and accurate way.

Appoint a solicitor as soon as you accept an offer and keep each other informed of progress.

It helps to focus people's minds on getting things done if a sensible completion date is agreed at the outset so that all parties are working to a common objective.

Defaults If the customer thinks that there may be a cash-flow problem and loan repayments will not be met, the best advice is ask for help.

There are specialist staff who can come to a decision about the future of the loan.

If it is a temporary problem, they are likely to be sympathetic and reschedule payments, especially if the beer supply could be lost to another brewer.

However, if a customer continues to fail to make payments or buys his drinks from someone else in breach of the loan agreement, then, like any other lender, the brewer will consider exercising its rights to recall the monies and realise its security, including selling any property or other asset used to secure the loan.

John Boardman is an independent consultant.

He ran Carlsberg-Tetley's Free Trade Loan activity until recently