Dispensary Financing: Business Loans
In general, businesses can raise money in two ways: Going into debt by taking out a loan, or offering a stakeholder equity—or part ownership—in exchange for funds. Let’s begin with the topic of debt.
If the cannabis industry were like any other, the question of how to raise funding through debt would largely be open-and-shut: Getting a business loan. However, there are a number of complications when it comes to cannabis financials. For one thing, cannabis ventures can’t apply for loans backed by the Small Business Association. Why not? You probably guessed it: Cannabis’s continuing federal classification as a Schedule 1 controlled substance. This also applies to any federally funded COVID assistance efforts, such as PPP loans.
Along the same lines, some banks won’t do business with cannabis ventures. Fortunately, this is rapidly changing for the better. Whereas there were nearly no financial services available for dispensaries and other cannabis enterprises a few years ago, these days there is an increasing number of options for dispensary financing.
What’s more, if the Senate passes the SAFE Banking Act, it will allow and encourage banks to offer cannabis ventures access to the same financial services other businesses enjoy.
Securing a business loan has a built-in advantage of allowing you to retain full ownership of the enterprise. But again—because of cannabis’ special legal status—there are hiccups when it comes to qualifying for such loans. Some common factors include:
- Good credit: Many analysts agree you’ll need a personal credit score of 670 or higher if you hope to get a decent rate on your cannabis business loan.
- Credit history: On the same note, the longer the credit history, the better. Having at least three years of demonstrated history improves your chances of securing a loan.
- No bankruptcies: In general, you can’t have bankruptcies or other negative indicators such as tax liens or foreclosures on your report.
- Business bank account: Having an account for your cannabis business will help you secure a loan. Need tips? Start here.
- Minimum business history: Unfortunately, many lenders require businesses to be up and running—often 6 – 12 months—before they’ll consider offering a loan.
- Legal status: Generally, all business owners must be U.S. citizens or permanent residents to qualify.
What kind of loan should you shoot for? Here are a few categories to consider:
- Working capital loans are designed to cover overhead costs such as payroll and inventory, especially in those first crucial months when you’re building your revenue stream from zero.
- Merchant cash advances provide retail operations such as dispensaries a source of cash against future sales; they’re typically repaid plus a fixed fee.
- Commercial real estate loans allow entrepreneurs financing to purchase land, warehouses, and other property necessary for their business.
- If you’ll be cultivating or processing cannabis, an equipment loan can help you buy the specialized machinery and testing devices you’ll need.
- Purchase order financing can front you money to fill customer orders. These cash advances are charged a fee based on how long it takes your customers to pay.
- Similarly, invoice factoring allows growers and processors to sell unpaid invoices at a discount to specialized financial institutions. They’ll be charged a fee based on how long it takes your clients to fill their invoices.
Given the challenges inherent to securing financing for cannabis enterprises, you might be tempted to jump on the first offer of financing that comes your way. It may well be above board, but we’d like to remind you that—as with any other financial agreement—you do your homework and be sure the financial institution is legit.
Are they registered with any agencies that regulate lenders, such as a state department of business oversight? Can you find reviews of their services? Do they participate in industry events, such as conventions? Remember: A financial institution is a partner in your business. The more you know about the organization, its values and its track record, the better shape you’ll be in to make truly informed decisions.
Dispensary Financing: Other Loans
If a traditional business loan isn’t in the cards for you, there are other types you can pursue. Here’s a rundown of the most popular:
- If a financial institution turns you down for a loan, they may offer you a business line of credit. While typically more expensive than a loan, it may be a worthwhile source of short-term funding, depending on your circumstances.
- It’s often easier to secure a personal loan than a business loan. However, it’s a good policy to be transparent about what you’re actually using the funds for. The same goes for a personal real estate loan, which can be used for the same purposes as a commercial one (just so long as putting it towards a cannabis venture isn’t specifically prohibited by its terms).
- Similarly, homeowners can often get a home equity line of credit to borrow against the value of their dwelling. Again, be sure to ask if using such credit for a cannabis venture is allowed by the terms of the agreement.
Dispensary Financing: Finding an Investor
The types of loans we point out above are all similar in that they allow you to retain full ownership of your cannabis enterprise. But there are upsides to opening yourself up to investors willing to shoulder some of the burden (and risk) of starting a new venture. This is called offering equity in your business, and here are a few ways that arrangement might work:
- Venture capitalists are a class of investors who helps new businesses grow in exchange for an equity stake. Some of the best-known examples in the cannabis field include Privateer Holdings, which has raised more than $100 million to fund legal cannabis businesses. Others include Tuatara Capital, MedMen Capital, and Snoop Dogg’s Casa Verde. Of course, there are a number of private venture capitalists interested in entering the cannabis space. Start your search on social media platforms such as LinkedIn, Facebook, Twitter, and Clubhouse.
- Angel investors are similar to venture capitalists but typically deal in smaller amounts of money. Depending on your relationship with that person, they may be willing to offer a personal loan. This can offer significant advantages compared with a loan from a financial institution, but it shouldn’t be taken lightly. Prepare to consult with an attorney before entering into any kind of a loan tied to your business.
- On a related note, you can always ask friends and family for a loan. Obviously, there are upsides and downsides to this approach. It can draw you closer to those you love and hold dear, or it can exacerbate (or introduce) new tensions into solid relationships. As with angel investors, be sure to consult with an attorney before entering into any agreement. It will help keep everyone focused and accountable, just as with any financial arrangement.
- Crowdfunding may sound like a fad, but it’s proving to be a popular and viable way to let multiple “micro-investors” participate in your business. U.S. law allows individuals to invest up to $2,200 in your business, up to a recently revised total of $5 million. Of course there are complexities in making sure all those investors receive their share of equity in the venture, but with platforms such as Fundanna, CannaFundr, and others entering the fray, there is an increasing number of options. Learn more about cannabis crowdfunding here.