Kilchoman Distillery, which grows barley for whisky production on site, may even need to build a further warehouse within two years if demand at home and abroad keeps up.
Kilchoman, whose core brand is the Machir Bay vatted malt, released its first spirit three years after production started in 2005. It was the first distillery built on Islay in 124 years.
A £450,000 loan from the Clydesdale Bank will cover the bulk of the cost of the new warehouse, with the balance coming from a £110,000 grant from Highlands and Islands Enterprise. Work on the building, which will have a capacity of 8000-9000 casks and employ two staff, is due to finish in six weeks.
The facility will provide a timely boost to the distiller which has been leasing warehouse space on the island as it gears up production to meet demand in the US, Sweden, Germany, France and the UK.
Managing director Anthony Wills said it could have been built three years ago. Mr Wills said: "It's been quite a long process because it isn't easy to get planning [permission] on Islay for commercial or industrial companies.
"It took us two and half to three years to go through the process of getting a plot of land and getting planning for it. The funding part of it was relatively straightforward."
Mr Wills said Kilchoman was now "cash neutral" after £4.5 million was invested by himself and fellow investors to start the business. Turnover last year was £1.6m leading to a trading profit of £160,000. Mr Wills and three others own 90% of the business.
He added: "It's a process that takes a bit of time, but we're delighted with the progress Kilchoman Distillery is making. That just shows the strength of the whisky industry around the world at the moment. Islay whisky in particular is doing phenomenally well."