In some ways, applying for cannabis and hemp industry funding doesn’t differ much from the process that businesses in other industries follow. Unfortunately, most banks refuse to work with companies in the cannabis and hemp industry because they worry about breaking federal laws.
Many banks won’t even let cannabis and hemp businesses use services for checking and savings accounts. Even as states encourage banks and other financial institutions to work with companies in the cannabis and hemp sectors, banks know they must follow federal laws. If the federal government decided to crack down on banks working with “criminal” organizations, it could target any bank that does business with cannabis and hemp companies.
Until laws change at the federal level, this situation will not likely improve in any meaningful way.
Private Funding Fills a Critical Role in the Cannabis and Hemp Industry
Private funders and investors might feel some pressure from the federal government. However, the growing opportunities to generate profits from cannabis and hemp make it nearly impossible for private funding to avoid the industry’s growth.
When investors and lenders look at the industry, they see opportunity. In 2019, the legal cannabis market generated about $13.6 billion in sales. As more states adopt medical and recreational cannabis laws, the legal market should keep going. Estimates show that the industry could reach $85 billion in sales by 2030.
Increased adoption of CBD, delta-8 THC, and other cannabinoids will only add to the industry’s growth with increased sales and high profits.
Cannabis and Hemp Funders Take Business Seriously
No one running a cannabis and hemp business or wanting to enter the industry should believe that cannabis and hemp funders take their jobs less seriously than funders in other industries.
The potential negatives of working in a semi-legal industry often mean that funders must scrutinize these opportunities in great detail.
Anyone interested in applying for cannabis and hemp industry funding will need to take every step of the process seriously. One mistake could mean losing access to funds.
Understand Personal and Business Credit History
Entrepreneurs who want to expand their reach in the cannabis and hemp business will probably need to prove they know how to handle their personal and business finances. Before pursuing funding, cannabis and hemp business owners should request copies of their credit reports. Everyone needs to take this part seriously because one in five credit reports contains inaccurate information that could damage a business owner’s chance of securing funds.
Disputing errors and getting them removed from credit reports can take months, so it makes sense to start this process long before applying for cannabis and hemp business funds.
Write a Detailed Business Plan
All existing and potential companies need business plans that show how they plan to operate and generate profits. The U.S. Small Business Association (SBA) has an excellent resource that can help entrepreneurs write effective business plans.
While there are different types of business plans, a traditional format should include the following.
An executive summary briefly describes the business and provides a high-level overview of its plan for growth.
A company description offers specific information about how the business will solve consumer problems and how it will create a competitive advantage over similar companies in the area.
A market analysis describes the industry and target market while providing information about industry trends. It also discusses how successful businesses in the industry operate and how the new business will compete with existing ones.
Organization and Management
The organization and management section describes the business structure and lists who will fill essential roles. An organizational chart can make it easier for readers to understand who manages each area of the business and why that person has the right qualifications for the job.
The product line should include all information about products the business expects to sell. If the business has filed intellectual property documents, such as copyrights for cannabis strain names, those documents should have prominent mention here and also appear in the addendum. (More on the addendum below.)
Marketing and Sales
The marketing and sales section describes how the business plans to connect with and retain customers. This section should take a detailed look at marketing plans because the costs will factor into the funding request and financial projection sections.
The funding request details how much money a business will need over the next five years and how it will spend that money. The request should include information about purchasing equipment, paying salaries, and covering bills.
Financial projections need to convince potential funders to provide money, loans, grants, or other funding options to the business. Existing cannabis and hemp businesses can provide information showing that they already generate profits. New businesses may need to include estimated expenses for the business, any collateral that can offset risk, and a five-year plan for becoming profitable.
An appendix or addendum includes any helpful documents or information, such as credit histories, product pictures, licenses, permits, contracts, and letters of reference.
Improve the Approach With Help From an Organization Like SCORE and SBA
Companies in all industries often experience challenges when seeking funding sources. New and existing businesses can improve their chances of success by using the services of organizations like SCORE.
SCORE provides training and mentorships that can make businesses more successful. Most cities have nearby SCORE locations where entrepreneurs can learn about subjects like:
- Successfully starting new businesses.
- Improving business plans so they appeal to potential funders.
- Finding the right business structure for businesses in the cannabis and hemp industry.
- Taking smart approaches to marketing new businesses.
- Understanding the differences between funding options.
SCORE isn’t the only resource available to new businesses. The Small Business Association (SBA) could also provide support for new and growing companies. Considering that the SBA is part of the federal administration, it will not help cannabis and hemp businesses secure funding. SBA offices may, however, work with cannabis and hemp businesses to improve business plans and compare funding options.
Understand Funding Options
Funding options in the cannabis and hemp industry look similar to those available in other industries.
Real Estate Loans
Cannabis and hemp real estate loans can help pay for storefronts, processing facilities, warehouses, and farmland.
Business Capital, Credit, Equity, and Loans
- AR and PO financing for cannabis and hemp businesses.
- Lines of business credit for covering short-term expenses.
- Asset-based and collateralized loans that often have lower interest rates than loans unsecured by collateral.
- Short-term working capital loans.
- Working capital loans.
Cannabis and Hemp Equipment Loans
Equipment loans handle leasing and financing for items like closed-loop extraction systems used to make concentrates. Many cannabis and hemp businesses find they can expand their product lines by getting equipment loans that help them make items like oils, tinctures, and edibles.
Comparing Cannabis and Hemp Business Funding Options
Interest rates and terms (equaling the length of time borrowers have to repay their loans) significantly affect how much money businesses need to repay.
A $50,000 business loan with a two-year repayment schedule and an 8 percent interest rate will cost the business about $4,272 in interest. The same loan paid over three years will cost the borrower about $6,400 in interest.
Small changes in interest rates will also dramatically influence how much money borrowers repay. A three-year loan with an 8 percent interest rate will cost the borrower about $6,400 in interest. Increasing the interest rate to 10 percent brings the overall interest payments to about $8,080.
Comparing funding options can take a lot of time and effort, but it helps businesses save money.
Secure Cannabis and Hemp Industry Funding From 420 Loans
Get the best terms and interest rates for cannabis and hemp industry funding by applying through 420 Loans. 420 Loans works with a network of lenders and financiers with experience in the cannabis and hemp industry. When entrepreneurs apply through 420 Loans, they can connect with the right cannabis financing option for new business or business expansion.
Instead of applying with multiple funders, turn to 420 Loans to get competitive terms that help ensure business success.