Cannabis equipment leasing is something that many businesses need to look at when starting out or if they are planning to grow the business. Leasing equipment may be required due to reduced capital, cash flow, or if a business needs to know if a particular piece of equipment suits their needs before buying it. All are good reasons to lease equipment as a cannabis company starts up or wants to grow.
Many companies in most industries in the US lease equipment at some point in time. Leasing stipulates that a business does not own the asset or equipment they are renting, but instead they pay a specific rate for a set period. In this rental period, the company can use the equipment as if they owned it. There may be certain stipulations within the lease contract around use, repairs, and returns but generally, leasing equipment refers to full use of it.
Starting in the cannabis market, companies should research which equipment can be leased rather than purchased. Finding quality machinery to lease can help with many financial aspects. Leasing does not have to be a permanent way of using the equipment, but it can be beneficial when funds are lower.
Reasons for Cannabis Equipment Leasing
Cannabis businesses often have more financial burdens than other mainstream companies due to extra fees, licenses, insurance, and legal costs. Cannabis equipment leasing is a good financing solution, as it can take some of the cost burdens off of an equipment purchase that can be overwhelming. Leasing can help with lowering overhead costs and possibly deferring tax payments. A cannabis business can also write off an equipment lease payment: a company can get some tax benefits that do not happen when they buy the full equipment cost. There is also the option of financing various lengths of time and the flexibility of payment plans that can help.
The ability to free up money and get new equipment is a good reason to lease when you are just starting out a cannabusiness. It also opens up the option of being able to upgrade equipment without an investment of capital more than once. There is more money for other requirements of the business. The ability to lease can be applied to the smallest item up to the largest. Businesses can find grow lights, packaging needs, HVAC as well as CO2 extraction needs, and more.
Other items may not be as obvious when it comes to leasing and that is things such as security systems, sales, growth, and production software. There may be a need for automobile and truck leases as well. Making a list of all equipment needed and then making multiple inquiries should get companies a competitive leasing price on most items.
Pros of cannabis equipment leasing:
- You don’t have to make a down payment
- Your payment plan is flexible, there is a deferred payment option
- There is less paperwork as you will deal with alternative lenders.
What to Consider before Cannabis Equipment Leasing
Do you want to rent a ready-for-use solution designed by the manufacturer or tend to create a custom system specific for your company? Though equipment providers create systems with time-tested characteristics, you may meet difficulties with getting enough capacity.
What supporting equipment will you need? For example, speaking of producing CBD isolate, it’s crucial to have not only the extraction machine itself (CO2, butane, or ethanol) but also distillation equipment and a rotary evaporator to remove solvents efficiently and gently.
How will you pay for the equipment? Each equipment rental agreement should be concluded in a manner that does not violate the marijuana regulations of your state. This means that the document specifies how the lessor will receive the money and that the payment plan doesn’t violate any state law.
Does the equipment have relevant certification? As there are certain risks in starting a business in this industry, you need to ensure your equipment is certified and compliant. It must meet all industry-wide standards and be certified by sectoral bodies. Here is a shortlist of certifications your equipment should have:
- ISO 9001
- PSI (Pressure Safety Inspectors)
- ASME (American Society of Mechanical Engineers) certification.
If you are planning to use such flammable materials as butane or CO2, your equipment must meet certain requirements to prevent potential explosions.
Will you need an additional refrigerated area for storage? If you have more than enough material, you should think in advance about where to store it, otherwise, it will go bad and harm your business and final profit.
Do you plan to test raw material and the final product yourself? If so, you should also think of some testing equipment, or outsource the process to a third-party contractor which will require more expenses with each batch.
Do you want to lease new or second-hand equipment? Keep in mind that some lenders may choose to keep away from financing pre-owned hardware due to the higher risk they carry in case of bankruptcy. However, some financiers offer such options, you just have to do a little bit more research to find them.
Will the lessor control the use of his equipment? You will need to make the regular rental payments. Besides that, the state may also require full information about the people who will take control over your company. Speaking of equipment leasing, the lessor cannot restrict you from renting from another company, as well as enforce additional services as a supplement to the leasing.
Does your agreement comply with the rules applicable for your state? In some states there must be a termination clause for all agreements, this helps the authorities to prevent third parties from creating “undue influence” over the lessee.
Does your agreement include potential rental defaults? In case of early termination of your lease, there must be conditions beneficial for both sides of the agreement as the weed is still illegal on the federal level and currently, there are no official arbitrations for potential disputes.
Overall, the cost of the equipment can be insurmountable. Leasing can relieve some of that burden. There are some significantly good deals in the market such as a lease for $1 after so many months of payments or no down payment or deposit needed. If the business’ credit is good, then this may be one of the options worth looking at when deciding which companies to use.
When you decide to go with cannabis equipment leasing, it is important to always know the terms of those leases. It is also important to know what financing options are available and down payment options that can help reduce monthly payments. Banks might offer some types of financing but due to legalities around cannabis companies, they tend to stay away from these types of business. Until cannabis is legal federally in the US, this is going to be a difficult area to finance. There are other options though such as companies that do leasing directly and lenders that are looking to support cannabis businesses.
Achieving a good lease contract and financing allows a company to loosen the cash restrictions and give more positive space on the balance sheet. There will be money available that otherwise would have gone into capital outlay. The company has more cash for R&D, labor, and testing.
Usually, cannabis equipment leasing is characterized by higher interest rates than for less controversial businesses. Speaking of agreed-upon rates, loans for standard equipment usually charge about 5-8% interest and the credit history of the cannabis business owner. Since the marijuana industry is less regulated and as a consequence more risky, rates are around 10-25%. As many financiers operate outside a traditional banking institution and position themselves as alternative lenders, it provides them more freedom to set as high rates as needed.
When beginning the process of leasing equipment, a business will have to provide relevant financial information about the company to the company it is leasing equipment from. Have bank statements, tax files, personal financial statements along with the company financials to go with the credit application. A credit score is also important, so the company can get as much financing as possible and the best terms allowable.
Along with the financial preparation, a business should make sure their accountants and lawyers are involved, if the leasing contracts revolve around significant amounts of money. The fine print on contracts is extremely important.
If you would like to share your experience with cannabis equipment leasing you can join our Cannabis Business Social Network on Cannabis Stack. If you join us you will be able to talk to peers, get knowledge and share experience.
How to Qualify
- The owner must be licensed and regulated by the government.
- Good financial and tradeline history (minimum credit score 650)
- 6 Months or more in business
- No bankruptcies in the last 7 years
- No unauthorized tax liens.
Though each company has its own list of documents you should provide to qualify for the lease, there are common papers each lessee needs to have to be prepared for the verification process.
Generally, leasing companies will ask you to provide at least 3 months of your bank statement. If you have more than one commercial bank account, you better include all the statements for each of them.
Driving License and Voided Check
To make sure that all of your information in contracts is correct, you may be asked to provide a clear copy of your driving license and a voided check to verify this information.
This may include business licenses, constituent documents, or franchise agreements.
Looking for Equipment
Cannabis equipment leasing can be found in most states in the US and many provinces in Canada. Before venturing into contracts and legalities, companies should make sure that the rules and laws that are binding with leases of cannabis equipment work for them in their specific location. There may be laws and regulations in certain areas that dictate the length of leases, type of equipment allowed, as well as issues with the security interest. Security interest, otherwise known as collateral, might be required if a business is leasing large and expensive equipment.
As the cannabis industry and its various markets struggle to find continuity amid new laws and regulations along with the 2020 pandemic, they are looking for ways to make their money go further. Leasing equipment is a good option when stretching the distance that cash will go. Finding good leasing contracts that are fair, have a good monthly price and low-downpayment can make a significant difference to a cannabis company’s bottom line. Having contracts for lower-cost leases can help weather any marketplace downturns or insecurities and certainly ensure cannabis companies can sustain themselves as they start to grow further.