The Best Options for Cannabis Financing
Entrepreneurs from every industry need cash flow to drive business growth. Cannabis business owners are no different, but the obstacles they face in securing business funding vary significantly from typical businesses. Higher perceived risk, regulatory restrictions, and federal laws against cannabis make it difficult for cannabusinesses to secure funds.
Today, we’ll cover the basic financing issues for cannabis companies leading the way in the medical and recreational use of cannabis.
- What is cannabis financing?
- Who needs cannabis financing?
- What obstacles do companies face regarding cannabis financing?
- What are the requirements for receiving cannabis financing?
- Uses for cannabis financing
- Alternatives to traditional cannabis financing
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What is cannabis financing?
Cannabis financing is the process of obtaining business capital through various financial resources to cover the costs associated with running a cannabis-related enterprise. When hearing about a cannabis business, cannabis dispensaries often come to mind. But cannabis cultivators, medical marijuana clinics, and other related cannabis businesses also require funding to drive operations.
While traditional financial institutions and lenders can provide cannabis business loans, financing is often obtained from private investors or venture capitalists due to the stigma attached to cannabis products.
The various options typically available to a startup looking for cannabis financing can include:
- Personal loans
- Home equity lines of credit (HELOCs)
- Business loans or lines of credit
- Supplier cash advances
- Credit union loans
- Equipment financing and leases
- Investments from accredited investors
- Angel investment
- Crowdfunding
- Backing from friends and family
Some of these forms of financing are harder to come by than others. Traditional loans may be unavailable. For private loans, the company must demonstrate its loan worthiness and also show off its differentiators. This is especially true when competing businesses open up in a new state shortly after legalization.
Regardless of which form of financing they choose, cannabis businesses must carefully examine legal considerations, interests, and risks to ensure they receive sufficient working capital while protecting their assets.
Grow Your Cannabis Business: Overcome These Three Finance Challenges
The cannabis industry is experiencing a once-in-a-lifetime boom. Don't let poor cash flow keep you from cashing in.
What types of businesses need cannabis financing?
There are two types of businesses within the cannabis industry: direct and indirect.
- Direct cannabis businesses are those that “touch the plant,” such as cultivators, dispensaries, distributors, and laboratories.
- Indirect businesses offer services that support the direct industry, such as packaging companies, technology providers, and equipment manufacturers.
Cultivators: Cannabis cultivators produce cannabis plants and components like CBD for both medicinal and recreational purposes. They grow and process plants to create standardized products sold at dispensaries. Cultivators use techniques like adjusting nutrient levels and controlling temperature and humidity to create new strains with desirable characteristics. They must adhere to government regulations and product standards when creating strains and cultivating plants.
Processors: A cannabis processor transforms raw cannabis materials into a variety of products, such as edibles, oils, concentrates, and tinctures. This process involves extraction, refinement, and packaging for consumer use while adhering to strict regulatory standards to ensure safety and quality. Depending on state laws, some dispensaries must purchase finished products from processors within their own state or jurisdiction.
Laboratories: Cannabis quality control labs analyze product samples for potency, terpenes, and contaminants. They provide reliable analytical results to the industry, ensuring all products meet regulatory requirements and industry standards. Labs also offer services such as genetic profiling to trace the plant's origin and authenticate the product. They play a critical role in consumer trust and cultivators' informed decision-making.
Distributors: Cannabis distributors help ensure a safe and secure supply chain for the cannabis industry by handling all steps in the distribution process. They are the link between cultivators and retailers, ensuring that cannabis goods reach the right place at the right time while meeting all government regulations related to compliance and taxation. They also often provide additional services such as inventory management, security, and product tracking.
Dispensaries: Cannabis dispensaries are regulated establishments where individuals can purchase cannabis and cannabis-related products for medical or recreational use. Staffed by knowledgeable personnel, these dispensaries offer a variety of strains and products, ensuring customers find the right fit for their needs, whether for therapeutic purposes or personal enjoyment.
Some businesses related to cannabis don’t face the same financing hurdles as those that work directly with the plant. However, dispensaries and other businesses will need financing to purchase from these types of businesses, making financing options equally important to their success.
Packaging: Cannabis packaging companies provide solutions for both recreational and medicinal products. They offer printing services, including logos, branding, and warning labels, and they use innovative and custom designs to help differentiate products from competitors. Essential for protecting integrity, packagers provide an extra layer of security to guarantee quality products by ensuring compliance with health and safety regulations, like child-resistant or tamper-proof packaging.
Equipment: Cannabis equipment providers are responsible for producing and maintaining specialized and general equipment used in the industry. This includes a wide range of items, from grow tents and trimming machines to commercial plant driers, extractors, and decarboxylators. They also provide the technology necessary to ensure that cannabis production is safe and efficient, like HVAC systems or water chillers. Cannabis equipment providers help with installation, maintenance, and repair services so that growers have access to reliable tools when they need them. They enable cannabis producers to meet safety standards and ensure quality control throughout the entire process.
Technology: Cannabis-related tech and SaaS software companies design software solutions for the cannabis industry, including inventory management and compliance tracking, plus mobile applications for real-time operations. A suite of analytical tools is also available to optimize production by gathering data on cultivation and greenhouse environments. Such technologies help growers maximize efficiency and profitability while remaining compliant with local regulations.
What are the obstacles to cannabis financing?
Cannabis businesses, particularly those operating in the US, face considerable obstacles when trying to obtain financing. Despite the recent move by individual states to relax their rules on medicinal or recreational cannabis use, THC remains illegal at the federal level. Cannabis and its derivatives are currently a schedule I controlled substance in the United States, though cannabis may soon move to Schedule III. For this reason, any transaction involving this drug must be reported.
The current federal prohibition of cannabis prevents many banks and traditional lenders from accepting the risk of providing funding. Federal prohibition specifically means that cannabis businesses are ineligible for favorable loans from the Small Business Administration (SBA). Additionally, lenders that assume the risks of funding cannabis businesses may factor it into the interest calculations for lending, charging increased interest rates compared to mainstream businesses.
Two sets of restrictions dissuade banks from financing cannabis-related businesses (CRBs): the Anti-Money Laundering Act (AML) and the Bank Secrecy Act (BSA).
- The AML requires banks to report suspicious transactions related to money laundering and other activities that could be considered illegal or unethical.
- The BSA requires banks to report all transactions over $10,000 and provides guidelines for proper recordkeeping.
The requirements for both regulations make cannabis too risky for lenders to offer financing to cannabis-related industries. Lenders that do offer options to cannabis-related businesses often limit their services to ancillary businesses such as general suppliers, labeling and packaging designers, and technology companies like cannabis-specific point-of-sale providers.
While they support direct cannabis sales, indirect businesses offer a more favorable risk profile to banks since they are subject to less stringent legal requirements.
Grow Your Cannabis Business: Overcome These Three Finance Challenges
The cannabis industry is experiencing a once-in-a-lifetime boom. Don't let poor cash flow keep you from cashing in.
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What are the requirements for obtaining cannabis financing?
Although requirements vary by state, most cannabis-related entrepreneurs must meet the following requirements:
Strong personal credit rating: A strong credit rating is vital for securing financing for your business. For the major three credit bureaus, a score of 670 or above is in the “good” category. A high credit score gives potential investors confidence regarding timely loan payments. However, a strong credit may not save a business from being turned down or charged a higher rate.
Adequate credit history: A long history of good credit is essential when applying for financing, so lenders look for those with experience borrowing money and paying it back on time. As part of this, they review the borrower’s credit history, checking for recent activity and missed payments. A strong credit score coupled with a long history of timely repayment makes lenders more likely to take on the risk of providing capital and financing for your business.
Bankruptcy-free credit history: Lenders are often risk-averse, especially when handling a higher-risk loan like cannabis funding. Any indication that debt might not be repaid based on past performance is a major roadblock. Bankruptcy stays on a credit report for up to 10 years and might be used as a factor when reviewing your application.
Business account: A separate business bank account is required for cannabis lending, as it meets the increased reporting and regulatory requirements of applying for financing. Establish a business account under your business taxpayer identification number (TIN) along with any state filing requirements or permits.
US citizenship or resident status: US citizenship or residency is a requirement for borrowing funds to run a cannabis business. Regulations concerning lending and business permits for cannabis businesses may vary. Consult an attorney knowledgeable in this area for specific requirements.
Business plan: When seeking financing of any kind, a documented business plan with projected revenues, a mission statement, a SWOT analysis, and marketing plans form an important part of your financing application.
Uses for cannabis financing
Like many other retail or medical businesses, brick-and-mortar cannabis businesses like marijuana dispensaries and cultivators must source real estate, supplies, inventory, technology, and services to keep the business running.
Financing for the business often goes toward establishing locations and buying supplies and equipment for production and sales, including:
- Purchasing or leasing of office or manufacturing spaces for sales, cultivation, and testing
- Equipment to produce, test, or refine cannabis products
- Overhead expenses such as payroll costs, taxes, and other operational fees
- Research and development funding for new products and processes
However, risk and cash flow issues particular to the cannabis industry may make it difficult or impossible for these businesses to obtain equipment and get off the ground.
Alternatives to cannabis financing
There are some alternatives for companies seeking flexible, cost-effective ways to procure supplies for running a cannabis business. However, access to these avenues of financing isn’t universal. Businesses with cash often source goods and equipment through group buying or online ecommerce resources.
- Group purchasing organizations (GPOs) are third-party organizations that sell supplies to their members at discounted prices. GPOs can help cannabis businesses get the supplies they need without seeking traditional financing.
- Some procurement platforms offer services and vendor networks that support cannabis-focused businesses. These platforms provide many benefits for growing businesses, such as price comparisons, reporting functions, and spend management features. With these services, companies save time and money when sourcing products from suppliers, which helps them stay competitive in the market.
How Order.co approaches cannabis financing
Order.co takes a new approach to cannabis financing, providing risk reduction and reliable access to capital in a way that works for both buyers and vendors. This removes many obstacles that keep cannabis companies from reaching their full potential. With vendor and working capital access through Order.co, cannabis businesses can get up and running, source equipment, expand into new locations, and explore wider markets.
This is how it works: