Wed Apr 21, 2021 | | Banking Relationships, Cannabis, CFO Services

Guide to Securing Cannabis Business Funding


Cannabis Business Funding

If you are looking to open or expand a cannabis-related business, you may need outside funding to achieve your goals. Some experts estimate that on average dispensary owners need anywhere from $150,000 to $2 million to start their businesses due to hefty licensing fees and rigid capital requirements.

Unfortunately, most traditional banks do not offer business financing and banking to cannabis companies. As a result, it is typically more challenging to secure financing for your cannabis dispensary or business.

Read ahead to learn about the types of cannabis business loans you may qualify for and how to secure funding as a business in the cannabis industry.

The Challenge of Finding Cannabis Business Funding

The federal government has not legalized medical and recreational cannabis, making many traditional lenders hesitant to conduct business with dispensaries and cannabis-related companies.

Current Federal Government regulations could classify a cannabis business’s transactions as money laundering and even remove a bank’s master accounts from the Federal Reserve if it partners with cannabis businesses. These policies make it challenging for cannabis businesses to secure bank accounts with traditional banks and credit unions, let alone receive small business financing.

As a result, many cannabis business owners turn to alternative loans and funding options to procure enough capital to start or expand their businesses.

Types of Funding

Cannabis business owners typically apply for one of two types of funding: debt funding or equity funding.

Debt funding involves taking out a loan that you will pay interest on and eventually pay back to the lender. Using a credit card to purchase supplies or as working capital also classifies as debt funding, as you will need to pay back the line of credit.

Equity funding is the process of exchanging shares of your business for capital. This type of cannabis business funding is more challenging for new companies to receive because they cannot prove their profits, meaning they will need to work harder to show that they deserve another entity’s investment.

New cannabis businesses typically opt to apply for loans, which we will break down in the next section.

Types of Cannabis Business Loans

Cannabis business owners often utilize business loans to acquire the capital they need to start their businesses. Because business owners in the cannabis industry cannot typically receive loans from traditional banks, they often turn to alternative lenders and financing options for capital.

Aside from self-funding, which many new cannabis distributors utilize, here are a few alternative choices you may consider as a business owner in the cannabis industry:

Loans from Friends and Family

If you have family members or friends who can spare a few thousand dollars to help you start your business, you may want to turn to them before contacting a lending institution. Casual loans like these may lead you to pay less in interest, but even though they will have more flexible terms, you should still make an effort to repay them on time.

Business Loan Options

While you will not qualify for a small business loan through every bank, you may be able to receive one through a credit union or a bank that advertises its willingness to work with the marijuana industry. About 700 of the over 12,000 banks in the U.S. offer their services to marijuana businesses, and you will have a better chance of securing business loans through these cannabis-friendly institutions.

If you have the time and patience, you may want to apply to several of these banks and see what types of financing options they have available for your business.

Private Loans

If you cannot secure business or personal dispensary loans, you can also reach out to a private lender, such as a venture capital firm, to apply for a loan. Private lenders typically offer short-term loans ranging from one to three years and charge anywhere from 8 to 25 percent in interest.

You can often secure your funds from a private lender within one or two weeks of your approval.

Equipment Financing

You may also be able to apply for financing to cover equipment costs for your new or growing business. You can either apply to lease the equipment at a small interest rate or receive funds to purchase it outright.

Invoice Financing

Cannabis businesses tend to experience a cash flow lag due to the lengthy waiting period between opening an invoice and receiving payment. Invoice financing is a type of financing that allows you to receive partial repayment for open invoices, resulting in a more regular cash flow.

Commercial Real Estate Loans

Some cannabis businesses luck out and qualify for real estate loans from financial institutions. These small business loans can provide the capital you need to purchase the property for your dispensary or manufacturing facility.

Merchant Cash Advances

If all other cannabis financing options fail, you may consider applying for a cash advance to fund your marijuana business. Cash advances provide you with fast capital but tend to have short terms ranging between four and twelve months. You typically need to show substantial revenue to receive this type of financing, so you may look for another option if you are a new business owner.

How Much Can a Cannabis Business Borrow?

As with any business loan, the amount of capital you can receive through cannabis business loans depends on several factors, including but not limited to your:

  •           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 depend on your state’s medical marijuana and recreational marijuana legalization. If you live in a state that has not legalized cannabis for recreational use, you may have a more challenging time receiving financing.

If you have an exceptional FICO score and financial history, you may be able to secure a cannabis business loan large enough to fund all of your start-up costs. However, you will need to spend time looking for the right financing option for your needs and finding a lender that approves your application.

Contact CFO Strategies Today

Showing detailed, precise financial records can help prove your financial responsibility to lenders, giving you a better chance of qualifying for a cannabis business loan. Our CFO team can help you manage your finances as a start-up company, established CBD shop, cultivator, or licensed cannabis dispensary. Contact us today at 732-236-4454 to schedule a consultation with our financial experts or for a free business review.