Funding is necessary for your cannabis business, whether you’re starting a new venture or plan to take your existing business to a new level. For most industries, that comes in the form of bank loans or business credit lines, but cannabis businesses historically struggle to get any assistance from traditional financial institutions. That doesn’t change the need for funding – that just means these businesses need to seek sources outside of a bank or similar source.
By locating and understanding the right funding sources for the cannabis industry, you can ensure that your venture has enough cash on hand for your next big step.
Since approximately 10% of the funding that fuels the cannabis industry originates from traditional bank loans, that means the remaining 90% stems from alternative and private sources. To their credit, Congress is considering bills like the Secure and Fair Enforcement (SAFE) Banking Act to make it easier for cannabis businesses to start relationships with traditional financial institutions. Legislative gears in Washington take a long time to get going, however, so in the meantime companies will have to continue finding their own funding sources. (Importantly, banks can still work with the cannabis industry, even if the SAFE Banking Act does not pass.)
Here are some common funding options for new and expanding businesses, and why they are difficult for the cannabis industry:
While there are banks that will lend to the cannabis industry, they are much fewer and farther between than the banks willing to offer bank accounts to those same businesses. That’s because of the concern that a cannabis business’s collateral may be seized in a federal raid, losing the bank’s chances of ever being repaid for their loan. While it’s unlikely to happen, there’s a non-zero chance, and the risk-averse banks are not willing to take that chance, even if they offer banking services to the cannabis industry. Importantly, your chances of securing a loan go up if your cannabis business already has a relationship with a bank, as the institution knows the ins and outs of your company very well at that point.
Though traditional financial institutions may be reticent about lending money for a cannabis business, that doesn’t mean private lenders would have those same concerns. You’ll have to find a good lender that fits your needs and make sure that you’re not being taken advantage of, but private lending can often be as close as you’ll get to “the real thing.”
However, private lending gets expensive quickly. That’s because private lenders are associated with taking on more risk than a traditional financial institution. Borrowers can expect a lower loan to value (LTV) ratio, higher interest rates, aggressive payment terms and to offer more collateral in exchange for the loan. For example, if you borrow $50,000 from a private lender, you may be required to repay much more in just a few months with interest rates that could climb as high as between 12% and 16%. Private lenders also lack the kind of protections that traditional loans have.
By finding the right investors that are on board with your vision, you can find a good source of funding that can be put to work in your business right away. These investors will often play the long game with your business, opting to put money down now with the hope that your success will mean better gains from the shares they hold. As such, you won’t be beholden to payment deadlines generally associated with fixed loans.
However, working with investors means giving up a piece of your business in the long term. That may not be a fit for every business type or even for every business owner. Your funding also depends on the stock market and how your investors feel about your business’s performance. If things don’t go well, they can pull out and leave you hanging. Still, if things are going well, you’re going to have to share your profits with your shareholders, so your income could be reduced as a result. Finally, as partners in the business, your shareholders may not all agree on the direction your company is going and they may require certain changes or directions that you may not want to go. That kind of division could create significant tension.
In some of the states that have legalized medical or adult-use cannabis, legislators have set up development funds to help kickstart a new industry. For example, Illinois earmarked $30 million for its Cannabis Business Development Fund, which provides money for low-interest loans to fund businesses in disproportionately impacted communities.
However, this is not a practical first option, or even a secondary option, for many cannabis businesses. First and foremost, these are set up for very specific circumstances, often set up as equity provisions to improve minority access to the industry. That doesn’t fit every business out there. It’s also limited by state: If you don’t live in a state or city with these initiatives in place, you are not able to access this funding at all.
If all else fails, your friends, family and any personal savings you may have could go directly into your business. An individual deciding to invest in a cannabis business does not have restrictions – your friends and family can do what they want with their money. They are also more likely to be lenient on the terms. Either way, you may not see millions with this method, but it may be enough to purchase some equipment or pay the rent on a newly expanded place for a year.
Borrowing money from those close to you can run the risk of ruining those relationships if things don’t go well. People will eventually want to be repaid and if you fail to do that, you may hurt their trust in you and your business. The same goes for your personal savings: If you invest your own money and it disappears, you’re in trouble. If you’re not willing to sacrifice your own money and relationships to obtain funding, this funding option may not be right for you.
With all that in mind, the borrowing landscape for the cannabis industry could change in the coming months and years. As federal legislators work to make it easier for this rapidly growing industry, financial institutions are coming to grips with the fact that cannabis will be a lucrative industry to support, and that the time is now to get in on the ground floor.
That kind of sea change within the business financing world would be a major boon to cannabis companies. Gaining access to traditional bank loans would make everything significantly easier for cannabis entrepreneurs, fueling growth and expansion for small operators and large businesses alike. Not only would business owners be able to fund new projects and expand their businesses, but that kind of access would make it much easier to get started in the first place.
Once more banks get behind the idea of funding cannabis businesses, new businesses will pop up at a much more robust clip. Business owners in the cannabis industry across the country would be able to receive funding backed by the protections and guarantees that other industries enjoy. That not only eases an entrepreneur’s mind, but further legitimizes the cannabis industry as a bona fide segment of the American economy.
As the reality behind cannabis business funding continues to shift in favor of the business owner, we at Fincann stand ready to help qualifying entrepreneurs gain their financial footing. By leveraging our Cannabis Banking Financial Network™, we can bypass the issues that exist in cannabis banking by giving you a backstage pass to a consortium of cannabis-friendly banks operating within the United States. Our network eliminates most of the legwork for you, as we’ve already built strong relationships with these federally-insured banks, saving you years worth of time.
Our network continues to g row every day, with new options cropping up around the country as more institutions begin to change their mind about the cannabis industry. If you’re interested in learning more, contact us to see what lending options are available to you.