Financing options for cannabis are becoming increasingly common. With so much progress happening in this budding sector, it makes sense that the lenders serving it are offering business operators the chance to finance.
Lenders understand how challenging it is to fund cannabis businesses. But even if you’ve been operating a cannabis company for years, you might not be aware of the cannabis business financing options available.
What’s the benefit of financing in the cannabis sector? For starters, you’ll free up more of your cash-on-hand to allocate towards other aspects of your operation.
We’ve covered cannabis business loans. But what are the other options?
That’s precisely what we’ll discuss in this article.
Looking to optimize your cannabis business’s financials? Contact us today to learn more about how we can prepare your operation to scale.
What are the financing options available to cannabis business operators?
Conventional funding for cannabis isn’t always available. Small business loans for cannabis startups and dispensaries aren’t easy to access because of the intense regulations surrounding this industry.
Getting a business loan for a dispensary in Colorado or California might be more straightforward. But it’s still a challenge to get a cannabis business loan in thriving legal markets. Since federal law bans small business loans for marijuana businesses from federally regulated institutions, the state-level legality doesn’t matter.
Two of the main kinds of financing options available to cannabis company operators are debt funding and equity funding. Through debt funding, you’ll finance your business by taking out loans or utilizing a business credit card. You’ll then pay the lender back the sum of the loan plus interest.
Equity funding is a little different. This involves trading shares of your company for the capital you need. The lender is an investor, receiving their investment back in dividends or profit once the business sells.
For equity funding, the company already exists and has value. But debt funding using loans and credit is the go-to option for most new cannabis startup operators.
Companies that issue invoices can use invoice financing too.
What is invoice financing?
Invoice financing for cannabis is becoming increasingly common. Many cannabis operations have long lead times on open invoices. This usually means waiting between 30 and 90 days for payments on open invoices, resulting in cash flow lag.
Cash flow lag is a serious issue in cannabis because the business has to wait for the balance. Through invoice financing, cannabis businesses can get partial repayment for outstanding invoices.
Most commonly, we see cannabis brands, cultivators, distributors, and manufacturers using invoice financing. But ancillary companies utilize it for flexibility and consistent cash flow benefits too.
With invoice financing, the only interest accrued is from using the funds. You’ll be able to borrow for up to 90 days, and the fees are around 2.5 to 3.5 percent of the invoice amount. Then, the fees are assessed every 30 days.
Here’s how invoice financing for cannabis works, step-by-step:
- You issue an invoice for goods or services. This invoice is due in 30 days, and you request invoice financing.
- Part of the invoice total, usually around 80 percent, gets deposited directly into your account from your lender.
- You use these funds as needed to increase production, profits, or something else. Financing fees begin to accrue and continue until the remaining balance is paid in full to your lender.
- Once the invoice is paid in full to your lender, the lender pays the invoicing company and keeps the accrued fees.
In some cases, inventory financing is the best option for a cannabis operation.
What is inventory financing?
Inventory financing is an accessible short-term loan cannabis companies can back with inventory. This type of financing balances your business’s cash flow while offering funds you can use to buy more inventory or cover other expenses.
You’ll have your lender pay your vendors. Then, you can get cash-on-delivery (COD) pricing, which saves you money while you scale your business.
Through inventory financing, cannabis cultivators, distributors, brands, dispensaries, manufacturers, and ancillary companies achieve flexible financing that encourages solid vendor relationships and discounts. Using the inventory financing model, you’ll ensure your vendors are paid directly, with interest accruing when you use the funds.
You can borrow these funds for up to 90 days. The fees range from 2.5 to 3.5 percent of the invoice amount, and they’re assessed every 30 days.
Here’s how inventory financing for cannabis works:
- Your vendor ships the products to you and issues an invoice that’s due in 30 days. You request financing.
- Your lender sends an advance for the entire invoice amount to the vendor, covering the cost of your products.
- You receive and sell the products.
- You pay the lender back the invoice amount plus any accrued interest and fees.
Common Cannabis Business Financing Options
Equipment Leasing for Cannabis Operations
Growers looking to purchase farming equipment have access to special financing. Equipment leasing is becoming increasingly common for cannabis cultivators who would rather avoid buying the equipment outright. These leases usually have interest rates between 8 and 20 percent, with terms ranging from one to seven years. This is a quick option with leases typically available within five to fourteen days.
Cash Advances for Dispensaries & Other Cannabis Businesses
Dispensaries can find it challenging to find the funding they need. This is where cash advances can truly shine.
Unlike a loan, to receive a cash advance, dispensaries must have proof of strong revenue. The factor rates range from 1.30 to 1.49, with terms ranging from four to 12 months.
Funding is accessible fast, usually within one or two days. For dispensaries that need to raise capital quickly on a short-term basis, this option is available. But cash advances are one of the most expensive options, so we advise using it only if you absolutely must.
What are the financing options available to cannabis business operators?
Conventional funding for cannabis isn’t always available. Small business loans for cannabis startups and dispensaries aren’t always an option because of the intense regulations surrounding this industry.
Getting a business loan for a dispensary in Colorado or California might be easier. But it’s still a challenge to get a cannabis business loan in thriving legal markets. Since federal law bans small business loans for marijuana businesses from federally regulated institutions, the state-level legality doesn’t matter.
Two of the main kinds of financing options available to cannabis company operators are debt funding and equity funding. Through debt funding, you’ll finance your business by taking out loans or utilizing a business credit card. You’ll then pay the lender back the sum of the loan plus interest.
Equity funding is a little different. This involves trading shares of your company for the capital you need. The lender is also an investor, meaning they receive their investment back in dividends or profit once the business sells.
For equity funding, the company already exists and has value. But debt funding using loans and credit is the go-to option for most new cannabis startup operators.
Get Cannabis Business Financing
The cannabis sector is full of financing options. But the key to it all is to have the right documentation while forging connections throughout the industry.
Interested in organizing your business’s financials to ensure financing is always an option? Contact us today for expert assistance.
