New Frontier Data projects the U.S cannabis market is expected to reach $30 Billion in annual sales by 2025. This growth is fueled by increased consumption as adult-use becomes legal across the country. Given the upward trend, many entrepreneurs are eager to learn how they can start their own cannabis business, such as a dispensary or growing facility.
While breaking into this lucrative industry can be very rewarding, it doesn’t come without serious challenges.
One of the most significant hurdles entrepreneurs face is financing their cannabis business. Unfortunately, there are certain Federal regulations that limit the options when it comes to raising capital. Many companies are not able to get traditional business loans from major financial institutions like businesses in other industries could.
However, you can utilize other funding options to start and grow your cannabis business. Follow along to learn more!
Why it’s Challenging to Secure a Loan for Cannabis Business
Due to legal restrictions (see our cannabis banking guide), it’s almost impossible for a cannabis business to get a loan from a traditional bank. However, you might have 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 service legal hemp and cannabis clients.
When approaching a state-run credit union for a loan, keep in mind that you’ll need the following:
● A good credit score: A good personal credit score increases your chances of getting a loan from a financial institution.
● Financial records: financial statements provide in-depth information about your business’ revenue, expenses, debt load, profitability, and more.
● Annual income/sales: Loaners must know how much your business makes annually before giving out a loan. This helps understand whether your business can meet its short-term and long-term obligations.
● Term length: This is the loan repayment period.
Why Your Loan Request Might be Rejected
Should you find a bank willing to work with a cannabis business, there are still various factors that can limit you from getting the amount you need. It’s imperative to ensure that you know your business’s financials like the back of your hand. Many companies are rejected for the following reasons:
● Having too much debt
● Lack of (insufficient) collateral
● Lack of a clear business plan
● Poorly kept financial records
Equity Funding For Your Cannabis Business
Equity financing allows you to raise capital through the sale of business shares. This means you’re selling ownership of your cannabis business to an investor (shareholders) in exchange for money. You can sell shares to investors, state-run financial institutions, or the public. Equity financing is ideal for companies with short-term capital needs.
One of the great things about equity financing is that you don’t have to worry about repaying a loan, unlike debt financing. There are, however, some downsides. By selling your business shares, you give control to the shareholders. You also have to share profits with the shareholders either monthly or annually. With that being said, it’s still a viable option if you understand the risks that come along with it.
Venture Capitalists
Along with state-run credit unions, you could also seek investment from a venture capitalist specializing in cannabis. Because cannabis is a rapidly growing industry, many investors eagerly seek to support up-and-coming businesses. While some cater strictly to plant-touching enterprises, such as dispensaries or distributors, others support ancillary businesses like software & tech companies. Some of the best industry lenders include;
● Diamond business loans
● GoKapital
● Dynamic Alternative Choice
● Casa Verde
● United Capital Source
● Tuatara capital
Conclusion
Despite the regulations and restrictions, the cannabis industry remains booming with entrepreneurs. When seeking out investments to scale your business, know that having impeccable financials is a huge peice of the puzzle.
Need assistance with accounting, bookkeeping, or cash-flow management? Green Space is here to help! Get practical and reliable accounting solutions tailored to you and your business. Click below to contact us today for a FREE 30-minute consultation.
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