Cannabis business loans are often not easy to get. Starting a new business is challenging under any circumstances, but few entrepreneurs face more obstacles than those who choose to venture into the cannabis industry. The upside is high. The market is certainly there.
Though legalized for either medical or recreational use in thirty-five states, cannabis remains a Schedule I substance under the Controlled Substances Act of 1970. With that federal roadblock in place, traditional financial institutions won’t typically approve cannabis financing.
For those expecting this to change soon, don’t hold your breath. Banks and credit unions are federally insured, which is good for the average depositor. Does it help business owners dealing with federal statutes that criminalize their product? Not so much.
On a positive note, the US House of Representatives recently passed the MORE Act and Kamala Harris is pushing a similar bill in the Senate. In the meantime, cannabis businesses still need financing. In this article, we’ll cover how and where you can get it.
- Cannabis, Hemp, and CBD Oil Business Loans
- Pros and Cons of Cannabis Equipment Leasing
- Finding the Right Cannabis Business Loan
- Sources for Cannabis Business Loans
- Bridge Loans to Get You to the Next Step
- Merchant Cash Advances for Operating Entities
- Marijuana Dispensary Loans
- Venture Capital Firms
- Crowdfunding Sources
- Getting Your Cannabis Business Up and Running
Cannabis, Hemp, and CBD Oil Business Loans
When the average person hears the word “cannabis,” they generally think of marijuana. That could be the medical variety or marijuana for recreational use. Entrepreneurs, when asking for a cannabis business loan, are often adversely affected by this stereotype.
Hemp, on the other hand, is further along the road to respectability. It was removed from the controlled substance list in 2018 when the Farm Bill was enacted. That opened up the door for hemp derivative products to be marketed and sold, including CBD Oil.
Interestingly, Senate President Mitch McConnell, though an opponent of marijuana legalization, is an open advocate for hemp growers, many of whom are based in his native state of Kentucky. That could bode well for future efforts to decriminalize all cannabis.
From a traditional lending perspective, CBD oil business funding is more likely to be approved than medical marijuana dispensary loans. Keep that in mind when you draw up your business plan. You can always diversify your product line after you get the start-up money.
As for hemp business loans, you’re basically talking about opening a farm. That may be a tougher sell than simply financing a CBD oil business. Take a good look at equipment costs and potential profits and losses before doing that. It may not be your best option.
Pros and Cons of Cannabis Equipment Leasing
Start-up costs for cannabis businesses are high. That’s not because the product is expensive to manufacture. Once you have the right equipment, overhead isn’t significantly more or less expensive than any other business. Cannabis costs are more complex than that.
Despite state legalization, licenses and permits are still tough to come by and legal fees are going to add up. That’s not to discourage you from doing it. Cannabis is well-worth the money and effort once your business is launched. Just be prepared for what you need to do.
The other major start-up expense is your equipment. Should you buy it or lease it? There are pros and cons to both scenarios. Buying it means you own it, but it also means you’re stuck with it if you fail. Leasing leaves you the option of giving the equipment back if you no longer need it.
Another advantage to leasing is that the lease payments show as a business expense on the balance sheet. Owned equipment starts out as an asset, but the value depreciates over time. Your tax liability will be higher and eventually it becomes worthless to you.
Finding the Right Cannabis Business Loan
Democrats in the House voted almost unanimously to pass the SAFE Banking Act in 2019, but bipartisan support for the bill in the senate has yet to materialize. If signed into law, SAFE would prohibit federal penalties on financial institutions doing business in the cannabis industry.
This piece of legislation, combined with the MORE Act, could open up new cannabis business loan opportunities. It would also create additional tax revenue for the federal government, possibly the only reason both bills are still in play.
Of course, none of that helps you right now. The sources to obtain cannabis financing in the United States are limited. You can certainly seek venture funding, but there are other options available to you. To help with this, we’ve compiled a source list for you.
Sources for Cannabis Business Loans
Determining where to get your funding for a cannabis business has a lot to do with what exactly you need it for. Entrepreneurs looking to get a start-up off the ground will be looking for a business loan. In this space, the two of the top sources for that are:
- GUD Capital: Listed as a business capital marketplace, GUD Capital can help you with a private loan, real estate loan, equipment leasing, or even asset-based cash advances. They can get you cannabis funding up to $20 million and they have access to USDA loans that could be good fit if you’re looking to start a hemp farm.
- Diamond Business Loans: A California-based finance company, Diamond Business Loans has an unsecured capital program, lending for commercial real estate purchases, and equipment leasing options. They have an A+ rating with the Better Business Bureau and get you up to $150,000 unsecured if you have a personal credit score over 680.
Bridge Loans to Get You to the Next Step
If you’re unable to secure long-term funding, consider applying for a short-term bridge loan. These come in smaller increments and are designed to help you meet current financial obligations while you search for a more substantial cannabis business loan. Bridge loans have a higher interest rate, so shop around before taking one out. Start by applying at:
- Dynamic Alternative Finance: Unlike GUD Capital and Diamond, Dynamic Alternative Finance advertises the fact that they specialize in cannabis financing. If you’re looking for a bridge loan, this California-based company is a great place to start. They also offer working capital loans, real estate loans, and equipment lease financing.
Merchant Cash Advances for Operating Entities
To start a business from scratch, you need a loan. Businesses that are already operating and want to expand may be able to get by with a merchant cash advance. This is a secured loan based on your accounts receivable numbers and credit card invoices.
- GoKapital: For cannabis companies that have been in business at least four months, you may qualify for a $50,000 to $5 million merchant cash advance from GoKapital, based on your monthly credit card invoicing. They don’t do business exclusively in our space, but they do list “cannabis business loans” at the top of their “industries” menu.
- Small Business Funding: Yes, it’s a category, but it’s also the name of a finance service. A website that will shop your request to different lenders, Small Business Funding can help you get a merchant cash advance or term loan to keep your business cash flow moving. Try this even if you’ve applied elsewhere. You may find some new options.
Marijuana Dispensary Loans
Opening a marijuana dispensary requires a lot of paperwork and they are under constant scrutiny from state and federal authorities. Maintaining the level of vigilance needed to meet all of the regulatory guidelines is expensive, so go to a finance company that understands what you’re up against. There’s one that stands out above the rest:
- United Capital Source: United Capital Source openly promotes that they offer financing for marijuana dispensaries. They work with multiple lenders and have an easy online application process with human experts backing it up to help you get your business off the ground. Submit your application and you’ll be paired with one of these specialists.
Venture Capital Firms
When banks, credit unions, and even finance companies don’t seem to be the right option, the venture capital route might be. It involves giving up some equity in your company, but you get experience and solid financial backing in return. There are also a number of venture capital firms that focus specifically on the cannabis market. One of these might be right for you:
- Casa Verde Capital: The team over at Casa Verde Capital has invested in start-up and ancillary cannabis businesses. The latter includes software platforms, laboratory technology, and media companies that cover business and development in the cannabusiness space. For those looking to scale, this is a good place to start.
- Tuatara Capital: Considered one of the more innovative VCs in the space, Tuatara Capital sees cannabis as a globally emerging industry with untapped research and development opportunities. They’re based in New York and already boast a cannabis-rich portfolio, but they’re always looking for promising new partners.
- Privateer Holdings: Privateer Holdings states on their “about” page that they represent a group of investors seeking to end cannabis prohibition. That’s the type of strong language you’re looking for when seeking venture funding for your new cannabis enterprise. Privateer is based in Seattle and operates mainly on the west coast.
When all else fails, crowdfund your idea. A number of highly successful companies started out this way and eventually grew into a large enough entity to qualify for more traditional loans or venture funding. Here are five crowdfunding sites you can check into.
- Indiegogo: One of the more progressive financing applications online, Indiegogo has approved a number of cannabis businesses for crowdfunding on their website. These include companies that advocate for cannabis regulatory changes and media companies that produce films and books on the subjects of marijuana and CBD oil.
- Kickstarter: Even though they are considered one of the top crowdfunding sites in the world, Kickstarter isn’t known to be overly supportive of the cannabis industry. You’ll see ancillary businesses there that produce supplies and support materials, but growers and marijuana dispensary companies don’t generally look for funding here.
- StartEngine: Endorsed by Shark Tank’s Kevin O’Leary, aka Mr. Wonderful, StartEngine does not have a cannabis category, but they do offer crowdfunding for agricultural and pharmaceutical projects. If you’re looking to get involved in that end of the cannabis business, this may be a good source for start-up funding.
- CannaFundr: Launched in 2014, CannaFundr is an equity crowdfunding platform specifically for the cannabis industry. You have to be approved to join, but there’s no fee and the platform will connect you to investors who are interested in putting their money behind marijuana and CBD companies.
- Fundanna: Promoting themselves as “the first regulation crowdfunding platform for cannabis businesses, Fundanna is a good source to find the funds you need to start a hemp, medical marijuana, or CBD oil company. Like CannaFundr, they are exclusive to the cannabis business space, so investors there are looking for what you have to offer.
Getting Your Cannabis Business Up and Running
Obviously, you’ll need money. Hopefully this article provides you enough sources to take care of that item on your checklist. Make sure you have a solid business plan and don’t overpromise to your investors. You should do okay if you follow both of those suggestions. On top of that, you’ll need to put some infrastructure in place. Ask yourself the following questions:
- What do you need for equipment?
- Do you have to buy or rent real estate?
- How will you market your product?
- Who are your competitors?
- What do your costs, price points, and margins look like?
This is the no BS part. Lots of people have great ideas and cannabis is a lucrative market to get into, but it’s also a highly competitive one. Don’t do it just because your friends like to smoke weed or chill out on CBD gummies. This is a business. Treat it that way. If you don’t have business experience, find someone who does and ask for help.
Kevin is a contributing author to several financial publications online. He has worked in the industry as a writer for several years now, and often works with financial planners to create world-class content.