Apart From being a wonder plant, did you know that cannabis is also a cash cow? In fact, the legal cannabis industry is expected to be worth a staggering $84 billion by 2028. If you’re itching for a piece of the pie, the best time to get your foot in the door is now.
Emerging business opportunities in the cannabis sector have plenty of entrepreneurs cashing in on the now bustling industry. However, just like any business, you’ll probably need help to finance your cannabis business off the ground. The problem is finding cannabis financing is easier said than done.
The problem with getting financing for a cannabis business is that not many financial institutions are open to funding a cannabis business. Cannabis financing faces a unique hurdle, and that’s the federal legality and illegality of the venture.
What’s more, cannabis startups also face a challenge finding and convincing potential investors of the trade’s profitability. All these barriers beg the question, “How does one finance a cannabis business?”
In today’s piece, we’ll be highlighting ways you can get financing for your cannabis business.
Why Is Cannabis Financing So Hard to Get?
Running a cannabis business alone has its own set of challenges. Apart from the usual business challenges, you also have to contend with shifting legal regulations, including licenses and permits. There’s also the question of public housing legality, and last but not least, funding.
A lot of banks are open to financing cannabis businesses, but only those that directly deal with the plant and its derivatives. If you’re a hemp cultivator, finding financing for farm implements and equipment should be a breeze. However, if you’re looking to start a marijuana dispensary or CBD shop, you’ll have a little trouble financing your business.
The main reason why most banks are unwilling to offer cannabis financing is because of the Federal Deposit Insurance Corporation or the FDIC. Banks don’t receive insurance from the FDIC if they take on “existential” risks. Some of these “existential” risks include financing companies that violate federal law.
Because the legality of cannabis is still somewhat murky, not many banks are open to cannabis financing because of the FDIC. Recreational marijuana is currently legal in only 15 states. This means funding any business outside these 15 states is tantamount to aiding and abetting criminal activity.
Ways to Finance Your Cannabis Business
Despite the many stumbling blocks marijuana businesses may face when seeking financing, there are a few ways you can get financing for your cannabis businesses. Here’s how you can finance your cannabis business.
Short-Term Loans
A short-term loan is a type of loan that lenders offer for start-up or working capital. As the name connotes, short-term loans are repaid in a short period, usually six months, a year, or one and a half years at most.
Unlike business loans, short-term loans don’t have an interest rate. Instead, lenders use a factor rate or factor fee; a one-time amount that you must pay on top of the loan. Lenders arrive at the factor rate by considering various factors like your business performance and credit score.
Because short-term loans don’t attract interest, they are much faster to process. They’re also a bit cheaper since some lenders might charge interest rates for other types of loans. The demand for short-term loans has engendered competitiveness among lenders, making them easier to acquire than other business loans.
Short-term business loans are especially ideal for getting working capital for your cannabis business. They’re not so great for starting capital because by the time the repayment period elapses, you may not have made enough to pay back the lender.
Lines of Credit
A line of credit or LOC is another excellent option to finance your cannabis businesses. With a line of credit, you and the lender agree on a borrowing limit that you can borrow at any time. Once you repay the amount you borrowed, you’re free to borrow again up to the stipulated limit.
The lender will only charge interest or a fixed fee on the amount you borrowed. Your business performance and your credit score are what determine your interest rate.
If you have terrible creditworthiness, you can still receive a line of credit. That’s because some lenders base their approval on business performance only. If your cannabis business has regular cash flow, you’re good to go.
The most significant advantage of lines of credit is their unmatched flexibility. The lender transfers cash to your business account the moment you request it. You can access the cash by the next business day.
What’s more, with Lines of credit, you can use the cash for whatever purpose. You can use it for your payroll, to hire new staff members, or for your expansion strategies. However, be careful with lines of credit because there’s always a high potential for overspending.
Crowdfunding
If you’re not having luck with financial institutions, you can consider crowdfunding for your cannabis financing. Many small businesses opt for crowdfunding to finance their activities, especially during the startup phases.
With crowdfunding, your business attracts multiple investors with the promise of equity or rewards should the business succeed. Crowdfunding is much easier these days, especially with the growth of the internet and social media.
For successful crowdfunding, you’ll first need a social media account with a considerable following. Next, you’ll have to create an online crowdfunding campaign on a crowdfunding site like Kickstarter and Indiegogo. Share the link with your family, friends, and social media to attract investors.
Anyone who gets the link can donate to your crowdfunding campaign and help finance your cannabis business. Crowdfunding breaks down into two types, namely:
Equity crowdfunding: This type of crowdfunding means you must give up equity in your business for outside investments.
Non-equity crowdfunding: Instead of giving up equity, you have to give every investor rewards for their investments. Of course, the rewards must be more than the investment amount.
The only downside to crowdfunding is that only a few crowdfunding sites are open to crowdfunding cannabis businesses. You, therefore, have to really do your digging to find one that does.
Equipment Financing
Purchasing new equipment makes up a huge chunk of your business expenditure, especially during the business’s early phases.
Equipment financing allows you to purchase equipment for your business. For your CBD business, you’ll need POS terminals, a few fixtures, and a vehicle if you plan on delivering your merchandise.
There are two types of equipment financing, and they are:
Equipment loan: With an equipment loan, you pay about 10% to 20%of the equipment’s price. The lender will take care of the rest of the cost, so you can acquire the equipment and put it to use. If you have good credit, you may not have to pay any down payment.
Equipment lease: Just like an equipment loan, the equipment lease also needs a down payment. Once you make the down payment, you can use the equipment all through the lease period. However, you’ll have to return the equipment once the lease period ends and renew the lease.
The only way you can own equipment on lease is if you pay the remaining balance. However, if you frequently have to upgrade your equipment, then an equipment lease could be right for you.
Equipment financing has friendlier terms than other types of business loans, but they only cover equipment.
Alternative Lenders
If financial institutions and traditional lenders have turned you down, you might want to consider alternative lenders. Alternative lenders operate outside the conventional banking system and are a fallback option for people who can’t get financing from banks and other financial institutions.
Alternative lenders offer a wide range of financing options for both personal and business needs. Because they operate outside the traditional banking system, they’re more willing to assist with cannabis financing. That means you can get invoice financing, lines of credit, and business loans for your cannabis business.
However, note that most alternative lenders have strict repayment terms. For instance, some alternative lenders may repossess some of your business equipment if you fail to pay back the loan in time.
As such, you must be absolutely confident that you’ll be able to make full payments after the stipulated period. Make sure you read the contract to the letter before signing on the dotted line.
Also, only settle for a credible alternative lender who can get you the financing you need. You don’t want to have finances and funding issues when your business is showing an upward trajectory. You can work something out with the lender before you receive the financing.
Financing Your Cannabis Business Isn’t Impossible
Cannabis financing is pretty difficult, but not impossible. The information above is all you need to start making arrangements for financing your cannabis business. Remember, if you don’t manage to get funding from traditional financial institutions, you can always turn to alternative lenders.
The prosperity of your new business goes hand in hand with the kind of lender you settle for. For honest and reliable cannabis financing, contact us today.
