Like most companies, businesses in the cannabis and hemp industries often need financing to fund research, expansions, technology, storefronts, and other projects that help them reach their financial goals. Where and how a business can access financing depends on several factors, such as the company’s location and whether it plans to work with hemp or cannabis.
The following guide will help potential cannabis investors and entrepreneurs understand the financing possibilities that apply to their ideas.
Apply for Cannabis Loans from Non-Traditional Lenders
Unfortunately, most banks, credit unions, and other traditional lenders do not usually give loans to cannabis companies. Since the federal government oversees banks, institutions tend to follow federal law. That means most banks will turn down cannabis loan applications, even in states that are able to legally sell marijuana.
As stated in a 2018 report, although Wall Street has begun to warm up to the idea of financing marijuana businesses, banks are still often concerned about repetitional damage.
Of course, some are more eager than others as the market continues to grow at an exponential rate. However, marijuana remains a Schedule 1 drug at the federal level.
A lack of access to financing is a major problem for marijuana stocks. This is why many companies require funding from sources such as credit unions, direct lenders, and equity firms — specifically those who understand the industry itself.
Cannabis Business Loans
Cannabis business loans often offer the type of flexibility and understanding that many cannabis companies seek. The lender and the borrower agree to specific terms, such as the cannabis business loan’s interest rate and term, which dictates how long the borrower has to repay the full amount.
Cannabis business loans are often broken down into more specific categories. For example, the loans covered in this guide include working capital loans and equipment finance loans. They’re all sub-types of generic business loans.
Business Capital and Working Capital Loans
Working capital loans, also known as business capital loans, address immediate funding needs like paying rent, payroll, and buying products to sell to consumers. For the most part, businesses that get working capital loans have cyclical sales. For example, a farm may only see income when it harvests and sells crops.
Since it takes hemp about 60 days to grow from seed to a harvestable plant, farmers can expect 60 without revenue. A working capital loan can pay for essential expenses until the farmer sells the product. This funding is required in order to produce the product itself.
Lenders may have secured and unsecured business capital loans. An unsecured loan does not require any collateral, but it usually has a higher interest rate. A secured loan has a lower rate, but companies must use collateral to offset the lender’s risk.
Lines of Credit
Lines of credit can help business owners when they urgently need to buy items. If a company that extracts CBD from hemp needs to replace a part, then it can use credit to purchase the part quickly. Even if the business doesn’t have enough cash on hand to buy the replacement, credit can fill the gap.
The problem with credit is that it usually has high-interest rates. Someone without perfect credit can expect to spend 20% or more on purchases. Repaying the amount before the end of the month helps companies avoid interest. When businesses need to borrow money from a line of credit, though, they usually end up paying interest at some point in the future.
Still, it’s impossible to deny that credit offers flexibility. It can also help businesses better track their expenses.
Equipment Financing Loans
Buying equipment for a cannabis or hemp operation can cost hundreds of thousands of dollars. A company that wants to extract THC or CBD from plants, for example, will need to purchase closed-loop extraction equipment. Even the smallest closed-loop extraction system from Iron Fist starts at $99,000.
An equipment financing loan may cover the full cost of purchasing equipment. The item purchased with funds from the loan then becomes collateral. The lender has a built-in reduction in risk because it can take back the equipment if the borrower doesn’t make payments.
Equipment financing loans usually last up to five years. At the end of five years, the borrower can choose to purchase the equipment.
Venture Capital and Private Investors
Venture capital firms usually invest in new businesses or startups that have solid plans for growth. The company has a great business plan and opportunity, but it does not have the money that it needs to take advantage of the opportunity.
Venture capital cannabis funding doesn’t require repayment. Instead, they earn money by taking a percentage of future revenues.
Venture capital funding often goes through several phases. At first, the business will receive seed funding to get it started. Assuming that the business reaches expectations, the firm continues to fund its product development and growth.
Private investors often take an approach similar to the one that venture capitalists use. The private investor, however, can set up any type of arrangement with the business owner or owners. For example, a private investor might give the company money in exchange for stock. Ideally, the stock’s value will grow and earn the investor money. Private investors can also demand influence over business decisions, board seats, and oversight to make sure the company moves in the right direction.
Venture capitalists and private investors take on a lot of risk when they give money to businesses. If the cannabis company does not succeed, then they could lose all of the money that they invested.
SBA Loans for Hemp Companies
The Small Business Association (SBA) will not fund cannabis operations because it must follow federal laws. The SBA can, however, give loans to hemp farmers, CBD extractors, and stores that sell CBD products. Companies in the hemp industry, however, must make sure that they follow federal and state guidelines. If their products contain more than trace amounts of THC, then they could lose their licenses and funding.
SBA loans have several advantages over traditional loans from banks. Some of the benefits include:
- Low-interest rates.
- Up to $5.5 million in funding.
- Long repayment terms that give companies plenty of time to repay their loans.
- Small down payment requirements.
- Flexibility that doesn’t force borrowers to spend money on specific items.
SBA loans don’t actually come from the Small Business Association. They come from banks. The SBA, however, guarantees up to 85% of the loan’s value. The guarantee makes it much easier for banks to give hemp businesses low-interest rates and long terms because the SBA has accepted most of the risk involved.
Funding From Lenders Focused on the Cannabis Industry
420 Loans helps cannabis investors and entrepreneurs access the funds they need. Cannabis loans have amounts from $500,000 to over $25 million. Cannabis real estate loans can pay for agricultural land, retail and dispensary space, warehouses, and industrial spaces.
Most lenders and funders don’t understand the unique challenges that cannabis and hemp businesses experience. 420 Loans has worked with enough successful cannabis companies to know how to spot an up-and-coming business that needs help getting started.