Food and drink manufacturing finance: why producers outgrow their bank
Most food and drink producers we speak to have more value in the business than their facilities reflect. The bank has an overdraft and a few hire purchase agreements, perhaps a mortgage on the factory, all agreed at different times. Meanwhile the debtor book has grown with new customers, the plant has been paid down, and the overdraft limit has not moved.
A food business borrows most heavily when costs spike and before seasonal peaks, exactly when the bank is looking at squeezed margins. The answer is usually a facility tied to the assets the business actually holds, debtors, eligible stock, plant and property, so headroom grows as the business trades rather than being renegotiated each year.
Asset based lending for food manufacturers
Asset based lending is one revolving credit facility with a single borrowing base across up to four asset classes. Debtors are funded at up to 90% of eligible receivables. Eligible stock is funded at up to 90% of its net orderly liquidation value, set by an independent appraisal. Plant and machinery is included at up to 85% of NOLV, and an owned site at up to 80% of market value, each as a term loan inside the facility. ABL facilities run from £2m to £120m, priced from 2% over Bank Rate on the receivables line, on 3 to 5 year committed terms. For a producer with a strong customer book, well-maintained equipment and its own factory, the combined facility is often several times the size of an overdraft.
Lenders adjust for the realities of the sector. Large grocer concentrations are capped, though strong names can justify higher limits. Credit notes for rejected deliveries and promotional deductions are treated as dilution. Most fresh and chilled stock is excluded from the borrowing base because it would have little value in a clear-out, while ambient ingredients, packaging and long-life finished goods can be included.
Getting the stock picture right
We split the stock early into perishable, chilled, ambient and packaging, and agree with the lender up front what is eligible. That avoids a facility that looks large in the term sheet and shrinks after the audit, which is the most common frustration we hear from producers who have tried ABL before.
What sits alongside the ABL
Asset finance for new equipment, trade finance for imported ingredients and any standalone commercial mortgage are separate facilities, not part of the ABL. We arrange them alongside it, often with the same lender, and agree the security and intercreditor terms up front so each facility does its own job.
Plant and machinery: inside the ABL and alongside it
Plant you already own can sit inside the ABL as a term loan at up to 85% of its net orderly liquidation value, amortising over 3 to 5 years, based on an independent valuation. Producers use it to fund a deposit on a new line, an acquisition or a working capital gap after a cost spike. Well-maintained equipment from recognised manufacturers values best; heavily bespoke or installed plant values more cautiously.
New lines, ovens, fillers, canning and bottling equipment, chillers and packaging machinery are usually best funded through asset finance, a separate facility at up to 100% of the asset cost over 2 to 7 years. That keeps the ABL free for working capital, and specialist food equipment financiers understand the resale market for used kit.
Cask finance for distillers
Distillers face a cash problem unlike any other producer: spirit laid down today may not be sold for years. Cask finance, sometimes called maturing stock finance, lends against the value of spirit maturing in bond. An independent appraisal looks at the age profile, the cask type, the quality and the market value of comparable spirit, and within an ABL the stock line can advance up to 90% of the appraised net orderly liquidation value.
A cask facility lets a distillery lay down more spirit each year, fund a new still or visitor centre, or bridge the years before its own aged releases reach the market. We need a clear cask register, warehouse records and independent valuation, and lenders will want to understand the route to market for the spirit when it matures.
Managing seasonality, energy and raw material costs
Seasonal producers, from Christmas bakery lines to summer soft drinks, need funding that rises before the peak and falls back afterwards. A revolving ABL or invoice discounting facility does this naturally, because the borrowing base rises as stock and debtors build. A clear 12-month cash flow forecast showing the peak, and the headroom at that point, is what lenders look for.
Energy and ingredient spikes are harder to plan for. Lenders are more comfortable where contracts include price indexation, where energy is fixed for a period, and where management can show how quickly past increases were passed on. Investment in energy efficiency, such as heat recovery or new refrigeration, can often be funded through asset finance and repaid partly from the savings.
Acquisitions, buyouts and succession
Many food and drink businesses are family owned, and a sale to management, a buy-in by an experienced team or an acquisition by a larger producer all need the debt structured around the deal. We advise on these transactions and run the debt process end to end, from the information memorandum and lender process to term sheets and completion. An ABL on the target's debtors, stock, plant and property can be combined with senior or unitranche debt of up to 5x EBITDA, which keeps the equity needed to a minimum.
What makes a food and drink producer fundable
None of this needs to be perfect before you call. We help get the information into the form lenders expect and write a credit paper that explains your customers, your plant and your margins, before we take it to the lenders on our panel who fund food and drink every week.
- Monthly management accounts with gross margin by product or customer
- A clean aged debtor report with credit notes reconciled
- Current BRCGS, SALSA or other accreditations and good audit results
- An up-to-date plant register showing condition and existing finance
- Stock reporting that separates perishable from ambient and long-life
- A cash flow forecast that shows seasonal peaks and energy costs honestly
Breweries, bottling and capex for new lines
Brewers and soft drinks producers face a capex cycle that never really stops: fermentation vessels, canning and bottling lines, kegs, pasteurisers and packaging upgrades to meet retailer demands. Asset finance spreads each investment over its working life, and a new line that comes with a confirmed contract is particularly well received by lenders. Breweries with an on-trade customer base also carry a sizeable debtor book that can be funded at up to 90% through invoice discounting or ABL, and duty deferment arrangements need to be built into the cash flow forecast.
For larger projects, such as a new production hall or a factory extension, we usually combine development finance, up to 72.5% of gross development value, or a commercial mortgage at up to 75% loan to value for the building, with asset finance for the equipment, phased to match the build so you only draw funds as they are needed.