Getting funds for your cannabis business is no child’s play. It can be more of a challenge than getting financed for many other business industry types. Many states in the US have legalized medical and recreational cannabis, and the number is growing. However, because marijuana-related businesses (MRBs) are still illegal under federal law, it’s more difficult for them to get loans, set up merchant banking accounts, and get other types of finance to grow their business.
The cannabis industry is not devoid of funding opportunities, although they are limited. When the more typical choices don’t work out, you’ll have to get creative. In fact, there are different options for receiving cannabis business funding.
What Type of Cannabis Business Funding Do You Need?
If you need working capital funding, make sure that’s clear when you request a loan. Likewise, if you only need funds to purchase inventory, that’s a completely different request than a long-term loan to fund your entire business. Hence, it is important to have a clear plan in place before you start looking for lenders and funders for your cannabis business.
Banks do not approve loans for cannabis business funding, but that’s not the end of the road. There are several other ways to fund your cannabis business, here are they:
Traditional Business Loans
Even if you have the cash and are a qualified borrower, banks may refuse to lend you money for cannabis-related purposes due to the following reasons:
Legal Restrictions: The Law Doesn’t Approve of It
Cannabis legalization differs by state, and it is still classified as an illegal Schedule I substance by the DEA and the federal government. Due to the legal wrangling that a change in the federal law could cause, the SBA will not issue loans. For the same reasons, most banks will not give loans or even create a checking account for a cannabis business.
Cash Business: Difficult to Trace
Cannabis is primarily a cash-based industry, with only a few adopting cryptocurrencies, which is a high-risk factor for several reasons: cash is difficult to trace, and cannabis businesses without checking accounts cannot produce bank statements or even a credit score.
If a marijuana company defaults on a payment, the lender has nothing to pursue or collect in order to get back their funds.
Why Do Banks Not Approve Loans To Fund Cannabis Business?
Most banks are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC will not cover a bank that collaborates with businesses that violate federal law. Medical marijuana dispensaries are included in this category. Instead of taking on this risk, most banks just avoid working with cannabis-related businesses.
When collaborating with enterprises in the cannabis domain, a bank may face legal issues. For example, accepting deposits from a medical marijuana dispensary could result in a bank being prosecuted for money laundering. Even though the chances of this law being enforced are small, lenders are unwilling to take that risk.
The cannabis sector is one of the fastest-growing industries right now, with a predicted $66.3 billion in revenue by 2025, and with that growth will come many eager investors.
In order to get larger returns, cannabis investors are moving their investment approach away from issuing loans to businesses and instead buying equity and stakes.
According to research published in the Marijuana Business Factbook, as the perceived risk of investing in the cannabis sector decreases, investors see more upside from investing in cannabis companies’ equity and are less interested in loan financing.
Explore the Cannabis Business Directory List
Business directories are exhaustive lists of companies that cater to specific industries or interests. Companies can put themselves in cannabis business directories to gain traction, enhance SEO, and make themselves known to potential clients and customers. They’re also a good place to look for cannabis investors.
Grow Your Network Through Cannabis Industry Events
Attending cannabis industry events and expeditions is another wonderful approach to find cannabis investors.
These events are beneficial for many reasons: they frequently include speakers and seminars to assist cannabis businesses, provide an opportunity for businesses to get their name out there, and offer an excellent opportunity to network with industry leaders face-to-face.
To Look For Potential Investors – Go Online
Although face-to-face interactions are still vital for investors, in today’s digital age, internet networking is an exceptionally effective approach to meet possible investors.
Many businesses locate possible investors using industry-specific social networks, forums, and web pages.
Meeting potential investors through online networking can be a very effective method.
Venture Capitalists (VCs) are large firms or wealthy individuals who fund in small businesses and start-ups with a stake or equity. While some VCs may avoid funding cannabis businesses, you may find some others specializing in cannabis business investments.
The cannabis industry is rapidly evolving, and several VCs have turned their attention to funding cannabis businesses to take advantage of the trend.
As of May 2020, the following cannabis start-ups collectively have raised approximately $1 billion, here are the top few:
- Eaze – This cannabis delivery app and online tool business has raised $202.5 million through VC funding.
- Surterra Wellness – This cannabis-based therapy company, has managed to raise $355.7 million.
- Canndescent – This business revolves around growing, packaging, and selling cannabis flowers. They have raised $57 million through VC funding.
Angel investors are individuals who make a big financial investment in a company. Individuals or small businesses who make a personal investment decision are more likely to get involved. Because angel investors are individuals, they have more freedom in terms of who they invest in.
You can finance your medical cannabis dispensary through crowdfunding. Crowdfunding has become a popular alternative for many small enterprises, including those in controversial industries, thanks to the rapid growth of the internet.
Crowdfunding is a method of raising funds from a large number of people in exchange for equity or rewards. You’ll advertise your crowdfunding campaign online by sharing it with friends and family and posting links to it on social media. Anyone may help you reach your fundraising goal by donating.
There are two types of crowdfunding campaigns.
1. Equity crowdfunding, which is giving up equity in your company in exchange for investments.
2. Non-equity crowdfunding refers to when you don’t give up ownership of your business but offer a reward or advantage in return to investors.
The tricky part about crowdfunding is that popular crowdfunding platforms restrict medicinal cannabis stores from posting on them. You will have to search for platforms that will allow you to launch and promote campaigns to fund your cannabis business.
If you have a good credit score and a stable income, you might be eligible for a personal loan to cover your cannabis start-up costs. Many start-ups choose this option because revenue, time in business, and business credit score aren’t taken into account when approving a loan. You must, however, indicate how the cash will be used. Because of the industry you operate in, some lenders may refuse to lend money to you, so you may have to shop around for a lender who will be willing to approve funds for you.
Friends & Family
Simply asking around is one of the easiest ways to find investors for your cannabis business. Many businesses start when they approach their family and friends for financial assistance. You could end up with a zero-interest loan or perhaps a new business partner.
Documents Needed to Get Your Cannabis Business Funds
Once you’ve established how much money you require and where you will be applying for funds you must focus on the documentation part. The documentation requirement may vary from lender to lender, but you should generally expect to present the following:
- Personal Information: Name, Social Security Number, and contact information
- Business Details: Business name, address, and Federal Tax ID
- Business & Personal Credit Score
- Personal Background Credibility Check
- Business Licenses & Permits
- Business & Personal Bank Statements
- Profit & Loss Statement
- Income Statement
- Balance Sheet
- Stable Business Plan
Aside From Funding, What Else Do You Need to Set Up Your Cannabis Business?
1. Laws, Regulations & Compliance: Understand the cannabis laws in your state. You wouldn’t want to be caught on the wrong side of the law, hence, solid research about the laws, rules, compliance, and regulations is required before you start setting up shop.
2. Stable Business Plan: A solid business plan can guide your business to success. It must include an operations plan, management plan, market and competitive analysis, and a financial plan as well.
3. Apply for Appropriate Licenses: Without a license, you wouldn’t be able to start your business. Therefore, contact relevant authorities and apply for licenses to kickstart your business.
4. Place of Your Business: This requires a lot of attention as there are a lot of regulations and compliances you have to adhere to, such as the location of your business must be away from schools, playgrounds, religious places, and so on. You will also need the backing and approval of your local municipality.
5. Choose a Winning Team: This is important as they will be the ones who will support your business to grow and succeed. Hire a diversified expert team.
6. Robust IT Infrastructure: To set up shop you require a competent IT infrastructure provider. You must contact us for all your technology needs such as security cameras, WiFi, scanners, printers, POS systems, and much more.
We will help you set up your store according to your expectations by procuring, installing, securing, managing, and scaling up your IT infrastructure in a quick span of time. You can talk to our team of experts today.
Plan, Decide, and Move Forward
Don’t overlook any possible funding option if you’re seeking a cannabis business loan. From cannabis-friendly lenders to purpose-built financing, there are several options for funding your cannabis business. As a result, consider a plethora of funding options and don’t become disheartened if your business loan application is turned down. Lenders and investors each have their own set of constraints and motivations.