Whether you’ve recently decided to start a cannabis business or have been in the industry for years, raising capital can be one of the most challenging aspects of the entrepreneurial experience. However, it’s particularly difficult to finance cannabis businesses because the industry is still gaining its footing.
The cannabis industry is still very young, and there are ways that entrepreneurs are getting creative with financing ventures. In this article, we explain how you can use cannabis financing effectively, cannabis business lenders and investors, loan types, and more.
Looking for expert assistance managing your cannabis business’s financials? Northstar is here to guide your success!
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How to Use Cannabis Financing
Cannabis financing is just now taking off in this young industry. Funding is essential for development, and for those who don’t have deep pockets, finding a source of cannabis business funding is crucial for success.
But acquiring a cannabis business loan is only part of the complexities surrounding this topic.
Cannabis business owners that obtain a cannabis business loan need to have a plan to become profitable. Or, if the operation is already turning a profit, how to increase those profits to ensure any cannabis loans can be paid back while scaling those profits.
Have you considered how to effectively utilize your cannabis business loan to ensure success? Here are some ideas marijuana businesses can utilize:
Whether cannabis businesses focus on recreational marijuana, medical marijuana, or operate as one of the many ancillary cannabis companies, facility construction can play a role in operational success.
Cannabis business owners are unlikely to find a facility that’s completely ready to operate. While the facility might come close to perfection, some investment will be essential to ensure it’s ready to operate – unless it’s an M&A for an established operation, of course.
However, if you’ve already found your property and need to build a facility, this will cost money. Your facility will need to meet the needs of your cannabis business, and allocating some – or even all – of your business loan may be essential to ensure your business can begin operating.
To Hire More Staff
Solopreneurs aren’t common in cannabis. Most of the time, financial institutions willing to offer a small business loan to cannabis business operators will want to learn more about your team before offering to finance your cannabis business.
However, even with a winning team in your corner, hiring more staff can facilitate multiple areas of growth for your business. With this in mind, it may make sense to obtain a loan and use some of the proceeds to hire staff – particularly, technical staff if it’s not an area you’re familiar with yourself.
Marketing & Advertising
Cannabis business loans are also allocatable towards marketing and advertising cannabis businesses.
Even if you have a marketing budget, think about how your business will spend its dollars wisely – and whether it’s necessary to pay for all of that marketing or if attracting more customers can be done with less investment out of your business’ budget.
This can also apply to any ancillary cannabis-related businesses. Pushing business financing towards marketing and advertising has the potential to give a cannabis business the fuel it needs to succeed, and if it results in an excellent ROI, it becomes easy to justify the expense.
Manage Cannabis Business Cash Flow
Business cash flow is a concern for any business owner. But for cannabis business funding, it becomes even more essential to consider.
Cash flow is the money that comes in and out of a business on a regular basis. For businesses operating in this space, this can be especially useful when it comes to paying for inventory – and if you have trouble funding your business with your current revenue, managing your business cash flow may become even more important than making strategic investments to grow your cannabis business.
Open a New Location
Your cannabis business might be doing increasingly well with each passing month. But at some point, there’s a chance you’ll want to open a new location.
This is where business loans can remove some of the wait time for business owners in the process of scaling their cannabis companies.
Rather than saving money to expand marijuana businesses, savvy ganjapreneurs obtain business loans to finance their new location. This has the potential to increase revenue significantly while the cannabis business pays back the business loan over time.
Equipment Financing and Leasing
Equipment financing has become commonplace in the cannabis industry. Rather than investing thousands of dollars to obtain the necessary equipment to conduct business, these financing solutions allow business owners to pay for the tools they need over months or even years.
For example, a cultivation operation lacking cannabis business funding can use equipment financing to pay for the cannabis grow lights, cultivation equipment, and irrigation systems they might need to start their business.
Equipment leasing works similarly. Rather than purchasing equipment outright, many businesses go with an equipment leasing option to obtain the necessary tools and machinery they need to get started.
Lawyers, Accountants & Other Professionals
Hiring a lawyer or someone to handle cannabis accounting can be essential for any cannabis business – especially if it’s your first time operating in this industry. However, engaging the services of a professional doesn’t always come cheap.
While a lawyer or CPA can help you avoid cannabis compliance-related legal trouble, they also charge fees for their time. If your cannabis business is just getting started, it might make sense to obtain business loans and use the funds to hire professionals who can assist in areas that aren’t up to par with industry standards.
Software & Security Systems
Compliance is crucial in the cannabis industry, and many states require cannabis businesses to use specific software and security systems, especially if they’re a hands-on operation. For example, METRC is essential if your business operates in one of the legal cannabis states that use it.
Using cannabis business loans for software and security systems can be ideal if you don’t have cash on hand. It’s also important to consider long-term planning and how using a business loan for this type of investment can result in savings over time.
Cannabis Business Loans
Where to get Cannabis Business Loans
Cannabis businesses might find it challenging to get small business loans. However, options for business loans exist. While cannabis business funding might take some creativity, business owners can acquire the capital they need to scale their operations in the cannabis industry.
The federal government has made it increasingly difficult for cannabis industry participants to obtain loans, whether for medical marijuana operations or business owners handling recreational cannabis.
Here’s are some of the most common sources for cannabis business loans:
Cannabis business financing options are available to this elevated space. But cannabis business financing solutions are still quite limited.
Business owners can check with several traditional lenders to see if that will work. But a financing company willing to offer cannabis business loans is usually one of the best methods for business funding.
Diamond Business Loans is one financing company operating out of California. This business helps cannabis startups and established operations find business funding through three main programs. The company offers an unsecured capital program, an equipment program, and a commercial real estate purchase program.
Other financing companies offer cannabis business loans, too. Some of these include Dynamic Alternative Finance, GoKapital, Small Business Funding, and United Capital Source.
Venture Capital Firms
Venture capital firms are becoming increasingly common in cannabis. This sort of funding is a good option for small business owners operating in the marijuana industry who would prefer to avoid taking on debt.
Equally important to understand is that a marijuana industry business owner that accepts funding from a venture capital firm is diluting his or her ownership percentage of the business. Thus, if your business is already earning money, it could be best to look for revenue-based business loans instead.
Most small business owners in the marijuana industry look at many grow facilities lenders and alternative lenders before choosing from the VC firms that are willing to work with a cannabis company. However, for those looking into these funding options, Casa Verde, Tuatara Capital, L.P., and Privateer Holdings are the VC firms that invest in the most cannabis and hemp businesses
Cannabis Business Loan Types
Small Business Loans
Small business loans are offered by banks and other traditional lenders to small businesses that need capital but operate outside of the cannabis industry. While funding options for this space are limited at many of the financial institutions regulated by the federal government, a cannabis business owner might still be able to find a small business loan.
Business owners seeking financing through banks or credit unions might obtain a loan based on their company’s revenue, cannabis equipment, assets, or personal guarantee.
The good news is that there’s increasing interest in offering cannabis loan options to small businesses. Meanwhile, some banks are starting to look at these companies as potential clients and offer cannabis business loans.
Business Cash Advance Loans
Some financial service providers may offer a merchant cash advance. However, this is usually one of the most expensive forms of alternative financing, and small business owners are usually better off steering clear of these cash advance options.
Cash advances are only recommended in extreme situations when no other options are available. It’s quite easy for a marijuana business to get behind when they choose to take a cash advance, and it’s important to remember that a business cash advance should be considered as a last resort.
Real Estate Loans
Commercial real estate leasing isn’t always an option for cannabis. Federal government restrictions on these operations make it less appealing to rent the property out.
This is where real estate loans can offer a cannabis business owner the option to buy real estate.
A real estate loan involves a formal loan agreement that helps a business owner purchase property and pay back the loan over time with interest. The loan proceeds to get paid off, and most business owners have a plan in place to ensure they have the capital to make the payments through their day-to-day operations.
Cannabis Working Capital Loans
Another type of cannabis loan is the working capital loan. These types of loans offer financing options for daily operations and are often an attractive option because they don’t require collateral, although the lending institution will review your cash flow and personal credit score to determine whether or not you qualify for a loan.
If your cannabusiness requires more funding than is offered by other commercial real estate financing options, it may be time to look into a working capital loan.
Cannabis Acquisition Loans
Cannabis acquisition loans are available in the cannabis industry, and some of these financing options can help a business owner purchase real estate or other assets.
These loans offer less debt than what’s found with typical acquisition loans, making them more attractive to those who are interested in large-scale operations. Cannabis acquisition loans are secured against property owned by business operators; therefore, this type of financing is only available when a business operator owns real estate.
Bridge loans can help a business owner acquire more funding when they need it most.
These loans provide the financial support that’s needed to purchase more inventory or property without having to pay for anything upfront.
Once a loan has been approved, business operators can keep their day-to-day costs low until capital raises have been made and other financing options have been considered.
A bank loan is another type of financing that’s available to marijuana businesses. But these loans have the fewest options as compared to other types of cannabis loan products.
A bank loan is also one of the most difficult forms of financing for a cannabusiness owner to obtain because banks are usually resistant to offering these products unless they’ve already received approval from their federal government regulator. Regardless of business credit or your credit score, most businesses in this space will have difficulty getting a bank loan because of federal regulations.
Private loans are a popular funding option for cannabusiness owners.
These loans are usually offered by family members or friends who wish to offer financial support without any strings attached. The simple nature of these loans can help business operators secure the funding they need within days and keep their day-to-day costs low until revenue has been raised.
Term loans are often used in the cannabis industry because they offer a fixed, predictable source of financing.
These loans are secured by an underlying asset, and interest rates can be adjusted over time. This offers business operators another way to secure funding for a positive cash flow situation with little risk involved.
SBA loans are one of the most popular financing options for new businesses in the cannabis industry.
The Small Business Administration (SBA) offers funding to cannabusiness owners who are interested in starting a business from scratch or purchasing real estate that would otherwise not be available to them with traditional lenders. The SBA has numerous guidelines and restrictions surrounding their loans, but if approved, these loans can help business operators secure enough capital to open doors and get started.
Cannabis Business Financing Solutions
Financing exists in this elevated space. Here are a few we recommend exploring if you aren’t already:
Invoice financing is a form of financing that helps cannabusinesses generate enough capital to pay their employees, taxes, and other business expenses.
Invoice financing is also beneficial for those who need help generating revenue because it allows them to purchase inventory upfront using an invoice rather than waiting for customers to pay.
While some companies might base their invoice financing options on a cannabusiness owner’s credit score, business credit usually works for the purpose of invoice financing.
Equity financing for cannabis businesses is also a popular option. The majority of businesses in this space aren’t eligible for traditional financing products because the legal regulations surrounding cannabis are so new.
Equity financing allows business operators to access funds from investors without paying any fees upfront. This form of financing is often provided to cannabusiness owners who already have a positive cash flow and need capital to help them scale their operations and bypass traditional lending guidelines.
If you have a high credit score, besides being eligible for cash advances, you likely have good personal credit. This form of credit can also be used as business credit.
Your business credit the same as your credit score and can be used for financing purposes such as investing in a cannabis company or borrowing money to purchase cannabis equipment.
The SAFE Banking Act has lessened the restrictions for cannabis lenders at the federal level. While many lenders still refuse to see those working with cannabis value as a potential customer, the fact that restrictions have eased at the federal level is enough for some lenders to allow cannacompanies to open a bank account and use these services.
Lenders may offer solutions to allow cannabusiness operators to purchase new or used equipment, property, and other expenses. But it’s important to remember that not all lenders are willing to provide loans to cannacompanies.
Alternate lenders and investors are equally important to consider. Here are some of the options available for cannabis:
- Family Offices
- Cannabis specific funds and a few hedge funds
- Angel investors
- High net worth individuals
- Musicians, athletes, and other celebrities
- Business incubators and accelerators
- Industry-specific holding companies
Recently, people have been using crowdfunding to start new businesses. There are many crowdfunding platforms available.
For example, some of the platforms cannabusinesses can use are Indiegogo and Kickstarter. Indiegogo has approved some cannabis companies for raising money through their platform.
Other known platforms include StartEngine, which has also approved funding requests for cannabis startups. Lastly, SeedInvest is a platform that welcomes cannabis companies to participate.
Concluding on Cannabis Financing
Whether you need to purchase property, don’t have working capital, are looking for a way to get the equipment you need, or something else, financing options are available. Hopefully, you’ve found the financing solution your cannabusiness needs in this article.
While the credit unions are beginning to support cannabusinesses, raising capital can be challenging for these operations. The space is still young, and as it matures, we expect to see more financial institutions offering support to elevated businesses.
Northstar: Guiding Cannabis Industry Success
Looking for expert financial guidance in the cannabis space? Northstar is here to guide you!
Contact us now for the financial services your operation needs to scale its success!