Distillery finance for stills, bonded stock and maturing casks

A brewery sells most of what it brews within weeks. A whisky distillery spends money on barley, energy, casks and warehousing today and may not sell that spirit for three, five or twelve years. Spirit sold as whisky in the UK must spend at least three years in oak, and for Scotch the GOV.UK guidance on producing Scotch Whisky sets out where and how that maturation must happen. Every cask filled is a long-dated asset that has already been paid for.

That shapes the funding situations distillers bring to us:

• Filling more casks. Raising production means more new-make spirit, more casks (ex-bourbon and ex-sherry casks are bought in and their prices move) and more warehouse space, with no matching rise in sales for years.
• Bridging to the first release. New whisky distilleries commonly sell gin, vodka or a young spirit drink in the meantime. That income often covers overheads but not the growing stock.
• Stills and plant. Copper pot stills, column stills, mash tuns and washbacks are made to order with long lead times and stage payments to the coppersmith.
• Bottling and packaging. Bringing bottling in-house, or ordering a large run of custom glass and gift boxes for a release, ties up cash months before Christmas trade.
• Duty on released spirit. Alcohol Duty falls due when spirit leaves duty suspension, not when a customer pays, so a big shipment to a distributor on credit terms creates a duty bill before the invoice is settled.

Spirit is produced and stored in an HMRC-approved excise warehouse, where it is held without duty paid. HMRC's Excise Notice 196 covers who must be approved to hold goods in duty suspension. For a lender, two consequences follow. First, the stock's value is a duty-free value, and a buyer in a forced sale would take it on in bond. Second, the warehouse keeper controls physical release, so a lender lending against casks in a third-party bonded warehouse will want written acknowledgement of its interest from the warehousekeeper and a way to stop casks being moved without consent. Clean warehouse records, with each cask's number, fill date, cask type and regauged strength, make this far easier.

Borrowing against stock that will not be sold for years compounds cost: interest accrues every year the cask matures, and a dip in the bulk whisky market can reduce the valuation the facility depends on. Over-filling casks on borrowed money is a common way for a young distillery to run out of headroom. Alternatives worth considering include contract distilling for others to bring in revenue, equity crowdfunding, which many craft distillers have used, and selling some casks to private buyers. Cask sales raise cash early but give away future margin, and selling casks as an investment product attracts regulatory and reputational scrutiny, so take legal advice first. If a duty bill is the pinch, compare a short-term facility with a Time to Pay arrangement or a tax loan. Directors should also read our guide to personal guarantees before signing for working capital.