If you want to start or build a cannabis-related business, you may need outside financing options to achieve your goals. Due to high licensing fees and strict capital requirements, some experts predict that dispensary operators may need anywhere from $150,000 to $2 million to start their operations.
Unfortunately, most traditional banks do not provide cannabis businesses with business financing or banking services. As a result, obtaining funding for your cannabis dispensary or business is often more difficult.
Read on to find out what types of cannabis business loans you might be eligible for and how to get finance as a cannabis company.
Why Are Cannabis Business Loans So Difficult To Acquire?
There are currently 18 states that have legalized recreational marijuana and 33 states that have approved medical marijuana, and eager company owners are ready to join this expanding market.
You’d think that with such a large movement in favor of decriminalization, getting funding would be simple as long as cannabis is legal in your state. Wrong.
Bank doors are shutting in the faces of would-be entrepreneurs, leaving them with few financing options. Many marijuana businesses find it difficult to get a bank account with a federally insured bank or credit union. Because cannabis remains illegal at the federal level, obtaining finance through a small company loan is practically hard, as banking institutions are prohibited from dealing with cannabis-related funds.
It’s still feasible to get to the green (both the money and the cannabis) in some way, but it’ll take a little more ingenuity than simply going to your bank and requesting a business loan. There are financing possibilities available, but business owners should approach with caution to avoid any unwanted federal government visitors.
A Cannabis Business Loan Is Similar To Any Other Loan
Present a clear business model to the lender. They want proof that you’ve thought about your options and how you’ll make enough money to repay them. Be prepared and figure out what you’ll need:
- Rental space
- Processing equipment
- Permits and licensing
- Marketing budget
Before you meet down with a lender, it’s a good idea to obtain some guidance from a financial advisor.
Tips To Securing Your Cannabusiness Seed Money
Here are a few tips to improve your chances of securing a cannabis business loan:
Improve Your Credit
This is true for every loan—even a small improvement of 50 points in your credit score can drastically improve your chances of approval. Start by paying off any loans or credit cards that have outstanding balances or late penalties.
Prepare A Solid Plan
When it comes to requesting a loan, you can never be too prepared. Bring two years’ worth of financial statements for you and everyone else on the loan. Checking, savings, and mortgage accounts are all included in this. You’ll also need proof of concept for your firm. As well as information about how you plan to make money and anything else that would be important for someone to loan you a large sum of money.
Save Up Your Down Payment
If you’re starting a dispensary or buying any other property for your cannabis business, put aside as much money as you can. This will demonstrate that you have the financial means to invest, as well as that you are responsible enough to put that much money into your company.
Get A Co-signer
Having a co-signer with good credit, especially if you’re a young entrepreneur, can boost your chances of securing a loan.
Find A Cannabis-Friendly Lender
Even in jurisdictions where medicinal marijuana is legal, finding a bank willing to engage with cannabis businesses can be difficult. This is due to the fact that cannabis is still illegal on the federal level, which can put banks under a lot of strain.
A cannabis-focused lender is familiar with the regulations and requirements of operating a dispensary or other cannabis-related business. They’re also more likely to approve your start-up for a loan because they don’t have the same anti-cannabis prejudice that many other banks do.
Top Reasons Your Cannabis Business Loan Can Be Rejected
Here are the top reasons a lender can reject your business loan:
Every traceable financial transaction you make—credit cards, debit cards, utilities, and so on—is added to your credit history. This implies that if you’re late on a loan payment even once, it will be on your credit report for the rest of your life. Late payments, credit defaults, or a debt-to-credit ratio that is too high will harm your credit score and make you a hazardous borrower.
Too Much Debt
This goes hand in hand with negative credit, but even if you pay your bills on time, a lender may see too much floating debt as a red flag. Some debt, known as secured debt, such as a mortgage, is actually beneficial. Your bank will be hesitant to finance your firm if you have student loans, personal loans, or credit cards, so keep those amounts under control.
No Clear Business Plan
If you go to a lender with a new business plan and can’t establish that your plan is profitable, they’ll turn you down. If you go to a lender with a shaky business plan and no clear plan in place, the same thing will happen.
If you’ve already started a business and need funding to expand, you’ll need to show that it’s growing—bring bank statements, ledgers, and anything else that indicates debits versus credits, as well as proof that you’re a responsible business owner.
Similarly, if you haven’t started a business yet, make sure you have all of your plans in order. Show where your supply will come from and what your expected costs will be, as well as how you’ll ship and sell your goods and anything else that will show you know what you’re doing. This will go a long way toward assisting you in obtaining financing.
Not Enough Collateral
You might be able to get a loan if you have a moderate or poor credit history but having collateral helps. Owning other property, such as a home or a business, is the easiest way to present collateral, but maintaining a consistent balance in a savings account is also an alternative. The bank needs to know that you’re trustworthy with money and that if you stop paying, they’ll be able to recover some of their investment from you.
Getting a co-signer with a longer, better credit history and established collateral is another option to avoid this issue.
Types of Cannabis Business Loans
Financing Through Private Investors
Because bank finance is largely unavailable in the cannabis market, many companies have turned to angel investors, venture capital, and private equity funds for help. They may also receive assistance from private loan issuers who provide high-interest loans. A cannabis firm must frequently meet specific standards to be eligible for these loans because it poses a higher risk to a lender. For example, it may be required to have a certain level of gross sales, a certain credit score, and to have been in business for a certain amount of time before applying for a loan.
A cannabis business may be required by a private investor to provide the investor with a significant ownership position in the company. While this may appear to be unappealing to a business owner, they may be able to keep complete control of their operations. Cannabis firms that only supply medical marijuana rather than recreational marijuana may have a wider selection of funding options.
Your company must have been in operation for at least a year to be eligible for a loan. Over the last three months, you should have made $90,000 in revenue, or $7,500 each month.
Short-Term Business Term Loans
A term loan is a one-time amount of money that you can utilize for whatever business needs you to require. Whether it’s day-to-day expenses or a single large buy to support growth.
Short-term and mid-term term loans are the most common types of term loans. Short-term loans are easy to qualify for, but they only deal in little quantities, whereas mid-term loans can provide you with a larger quantity of money, but they are much more difficult to apply for.
Term loans provide the advantage of dealing with factor rates. Instead of an accumulating interest rate, you will be offered a fixed sum to repay over a period of time.
As a cannabis business owner, this is a good alternative because you won’t have to worry about incurring a lot of interest while paying off the loan.
To qualify you must have:
- In business for more than a year.
- A minimum credit score of 500
- A greater annual revenue than $100K
Non-bank lenders offer private loans, which typically have interest rates ranging from 8% to 25%. The average loan period is one to three years, with cash normally available in seven to fourteen days.
In general, lenders prefer to fund cannabis farmers and manufacturers rather than dispensaries, though exceptions might be made for enterprises with demonstrated income. Venture capital firms are the primary source of private financing, which can be difficult to obtain due to the difficulty in engaging with these corporations, particularly for women and minority-owned enterprises.
A start-up loan, which can be either an equipment loan, a line of credit or a mix of both, can be extremely beneficial to a new cannabis business venture. They’re usually interest-free loans up to 15 months, allowing new dispensaries and other marijuana enterprises to expand without being restricted by interest payments.
This loan is not contingent on the length of time you’ve been in the company, annual sales, profitability, accounts receivable, or credit card volume. However, a credit score of at least 700 is required.
How Much Can A Cannabis Business Borrow?
Like any other business loan, the amount of money you can get through cannabis business loans is decided by a variety of factors, including but not limited to your credit score:
- Credit score
- Personal credit history
- Financial records
- Type of company
- Desired term length
- Annual sales (for established businesses)
- Business plan
- Previous bank statements
The amount you can borrow may also be influenced by the legality of medical and recreational marijuana in your state. You can have a harder time getting funding if you live in a state that hasn’t legalized cannabis for recreational use.
You might be able to get a cannabis business loan large enough to cover all of your start-up fees if you have a good FICO score and financial history. You will, however, need to devote time to locate the best financing option for your circumstances and a lender who will accept your application.
Last But Not The Least
Securing funds for a marijuana dispensary was previously more difficult than practically any other traditional type of business. But recent years have proved the possibility for profit, and many investors and financial institutions have changed their opinions.
The COVID-19 pandemic has only expedited the shift in confidence, with cannabis businesses judged necessary and the industry demonstrating resilience in the face of adversity. It’s motivating a lot of investors to change their strategies and get involved. However, you must understand that money has a cost, which is frequently an ownership stake.
If you require a business loan, be proactive and keep all your documents up-to-date to ensure that your loan is approved instantly.