While running a cannabis business can be financially rewarding, it also comes with its own set of unique challenges. In our Cannabis Banking Guide, we touched on the unwillingness of financial institutions to work with state-approved cannabis businesses. Because cannabis is still considered a Schedule 1 substance, one of the biggest hurdles you’ll likely face is raising the money necessary to get your business off the ground.
It’s no secret that starting and running a cannabis business is expensive. From licensing and permit fees to the cost of inventory and real estate, there are a lot of upfront costs to consider. If you’re looking for ways to raise capital for your cannabis business, here’s a breakdown of the options available to you.
Loans from financial institutions or private investors are two common sources of startup funding, and each has its own benefits and drawbacks. While securing financing is particularly difficult for cannabis businesses, there are ways to make your business more attractive to potential lenders and investors. Keep in mind that finding the right loan or investor can take a significant amount of time, so you should make this a priority in the early phases of developing your business.
Keep reading to learn more about your funding options and which route is best for your cannabis business.
Bank Loans
Until cannabis is legalized on a federal level, banking with major financial institutions will continue to be a grey area. Even if you’re operating in a state where adult use is legal, banks are still hesitant to handle capital that’s related to cannabis. While businesses in more traditional industries are able to secure small business loans, this is extremely difficult to find for most cannabis business owners.
While traditional banks in Canada will issue a loan for a dispensary or ancillary cannabis business, this is not the case for major banks in the U.S. You can, however, find some luck with smaller state-run credit unions. These institutions have fewer federal regulations and have even been given guidance from the government on how to serve legal hemp and cannabis clients.
It is important to note, however, that all banks are subject to a regulation called the Bank Secrecy Act. This requires banks to flag transactions of 5,000 dollars or more that may be associated with illegal activity, including cannabis sales. Business owners, especially dispensaries, might find this financial regulation quite limiting.
Private Investors
Because of the lack of options for bank loans, many private investors have picked up the slack. Seeing the potential in the emerging industry, many investors are eagerly looking to support cannabis-related businesses and operations. These include venture capital and private equity funds as well as capital brokers and private providers of high-interest loans.
Before deciding on an investor, it’s important to weigh all your options properly. Many companies are explicitly designed to accommodate cannabis businesses, for example, Dynamic Alternate Finance, Casa Verde, or Tuatara Capital. These companies work with your business to find private loans, equipment leasing, cash advances, or anything else you may need. Choosing a cannabis-specific private investor is the best option for plant-touching operations such as testing labs, dispensaries, or cultivators.
While private investors are an attractive option for entrepreneurs, it’s important to understand that these financiers often lend at higher interest rates for shorter periods of time. In some instances, they might even require that the lender convert a loan into an equity stake in the company. Researching all your options will allow you to make the best decision for the type of business you intend to operate.
Tips for Securing a Loan
The most important thing you can do is present a clear, transparent business model to the lender that you end up choosing. Since these lenders are taking a huge risk in investing in your business, they want proof that you’re able to make enough money to pay them back. Before speaking with any banks or investors, make sure you’ve considered the cost of permits and licensing, rental space, marketing budget, and employee salary.
The amount of money you can receive will depend on various factors, including credit score, financial history, term length, and the thoroughness of your business plan. A good rule of thumb is to prepare two years’ worth of financial statements for everyone on the loan. This will prove that you have an excellent track record and are responsible enough to manage large sums of money.
Before you meet with a lender, it’s a good idea to obtain some guidance from a financial advisor or accounting professional. During an investor meeting, the last thing you want is to demonstrate an amateur understanding of your business’s financial side.
Green Space Accounting can help you along the way with intimate knowledge of cannabis regulations and expert-level financial guidance. Working with Green Space will help you make sense of the monetary side of your business and put you in a better financial position.
If you’re interested in breaking into the cannabis industry but aren’t sure how to manage finances and accounting, contact us today for a free consultation.
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