Throughout the COVID-19 pandemic, retail businesses in New York have faced enormous financial challenges. Perhaps none more so than those licensed to sell alcoholic beverages. Restaurants, bars, nightclubs, caterers, hotels, stadiums, event centers, other entertainment venues, and manufacturers with retail operations sought relief from the federal government’s Paycheck Protection Program and Restaurant Revitalization Fund. Yet these businesses still struggle with labor shortages and accelerating costs. Both existing and new alcohol-serving businesses in New York are increasingly relying on additional financing to carry out their plans. Depending on where that money comes from, such financing can carry regulatory risk.

Financing Alcohol Businesses

            As any licensee can attest, the State Liquor Authority (“SLA”) often requires substantial information and documentation showing how an applicant intends to fund its business. The SLA does this because New York’s Alcoholic Beverage Control Law (“ABCL”) limits and prohibits financial and business relationships among industry members — manufacturers, wholesalers, and retailers. For example, ABCL § 101 generally prohibits a manufacturer or wholesaler from having a financial interest in a retailer, and ABCL §§ 105 and 106 prohibit a retailer from lending money to a wholesaler or manufacturer. There are also limits and restrictions on gifts and services between industry members.

            These laws are rooted in history. In the late 19^th century, New York and out-of-state breweries commonly had their own saloons or backed others’ saloons. The breweries often lent money to their saloon customers to keep their beer flowing to consumers. These loans often came with strings attached, including saloonkeepers agreeing to source beer exclusively from the brewery-lender and promising to meet beer sales minimums, regardless of the effect on the saloons’ neighborhoods. During Prohibition, with alcohol service largely illicit, traffickers extorted sales of their bootleg booze and fought, sometimes to the death, for control over alcohol supplies. For better or worse, financing by any means necessary has been a hallmark of the alcohol industry for centuries.

Reporting Funding Sources

            Times may be different in the 21^st century, but financing remains a priority for alcohol businesses. Many still rely on traditional financial organizations for loans and equity-based fundraising. Others are turning to alternative means for help. Regardless of the source, the SLA must be made aware of where the funds come from. Concealing the source of funds from the SLA in an application is a violation of ABCL § 130, could result in charges of availing (ABCL § 111), and may expose the licensee or applicant to a broader investigation ultimately resulting in suspension or revocation of its license.

            The most commonly accepted form of financing is self-financing. This means the applicant’s or licensee’s own funds, such as from savings or an operating account, are being used. Another commonly accepted form is obtaining a loan or line of credit from an established FDIC or NCUA-insured financial institution. In both cases, generally the SLA needs only disclosures of the person controlling the account and recent statements or loan documents from the institution.

            Loans from friends and family are treated differently. In these cases, the SLA frequently requires personal disclosures of each person lending the money as well as any documentation evidencing the loan, such as a promissory note.

            Increasingly, businesses are turning to merchant cash advance loans. These are typically unsecured loans paid back from business revenue. For example, a business borrows cash from a merchant and agrees to pay the merchant 9% of all credit card swipes until the loan has been repaid. The merchant is not a bank and may not even charge interest. Businesses relying on these arrangements should be careful, as agreeing to give a portion of sales to an unlicensed third party could result in a charge of availing. Such arrangements should be disclosed to the SLA up front.

            What about secured loans? Although licensees may pledge their alcohol inventory, ABCL § 114 prohibits a licensee from pledging a liquor license as collateral. Generally only banks or trust companies are authorized to dispose of the collateral in the event of default.

            Keep in mind that by law, the SLA must pre-approve new owners. For this reason, funds raised from angel investors, venture capital firms, and other sources of private equity can be trickier. They must be disclosed. Unlike lenders, those providing funds in exchange for equity become owners and sometimes officers, LLC managers or directors of the alcohol business. If an alcohol business has 10 or fewer owners, every owner must submit personal disclosures, including with respect to financing. If the business as more than 10 owners, only those owners with at least 10% interest in the alcohol business must submit these items. Others are simply listed. 

            Crowdfunding is uniquely challenging. Though the SLA has approved an application funded through non-equity-based crowd-sourced funds, the process was difficult. Because each source of funds must be identified, it can be near impossible to satisfy this requirement when dealing with hundreds of donors. The SLA is within its authority to deny any application that is crowdfunded or require the applicant to submit some proof that all other investors are qualified to hold a retail license.             Regardless of how applicants and licensees raise money to start, maintain or expand their alcohol businesses, they should understand the importance of candid and complete disclosures of all financial sources. As bootlegger Lucky Luciano said, “There’s no such thing as good money or bad money. There’s just money.”