Starting and maintaining a cannabis business is not simple, and cannabis financing is even more complicated. While marijuana production and selling are legal enterprises in some states, both are still illegal federally. This causes an issue with funding, as banks will not provide funding at this point. This is problematic as you have a market that has grown substantially in its start-up phase but no way to fund a marijuana business through a legitimate financial institution. However, there are options available.
Banks are looking for mainstream markets to invest in. The cannabis industry has not made that leap yet. Eventually, banks will get on board but in the meantime, alternative funding needs to be found. There is a financing option out there for every cannabis business owner and some out-of-the-box creative financing can help. You’ll find new ways to boost your business in our cannabis financing guide.
Ways to Finance Your Marijuana Business or Startup
1. Use your home equity
If your home has equity in it, then you can use that as business funding. Look at applying for a HEL (home equity loan) or HELOC (home equity line of credit), using your home as collateral. With equity financing, you should be able to get a reasonable interest rate on either of these.
The HEL would become a second loan against your home assuming you already have a mortgage on it. It will be less than the mortgage amount and will have a higher interest rate. The loan is given in one lump payment that can be used as working capital to open or maintain a cannabis business. The HEL usually come with a fixed interest rate and is paid off over a specific period.
A HELOC allows you extra flexibility, as you can take only what you need at the time out up to the maximum credit limit. The good thing with this is you only must pay interest on the money you have used, not the total amount of the line of credit. It is a flexible way to finance your business as you determine your cash flow and use only what you need. These types of loans have variable interest rates so payments will change as your loan amount and interest does.
The good thing about these loans is they are easy to get if you have equity, and there are no restrictions on how you use the money because the house is the equity by default. You get a low-interest rate and the interest may be a tax deduction. However, if you don’t meet repayment terms, you are at risk of losing your home and your cannabis startup.
2. Credit Cards
If you need short term money, or need your cannabis dispensary business up and running quickly for a fast profit, then think about using credit cards with a 0% introductory rate. You can often get 6-24 months at 0%. You will need to have good credit at 700+ and low debt to get enough credit to get you going. Be mindful that once the introductory rate is done, then you are going to have a high-interest rate on any balance remaining.
3. Apply for a business loan online
The third step of the cannabis financing guide is to find a business loan you can look at online. They may be easier to attain than traditional bank loans. You will have to do some searching for ones that will work with a business in the marijuana industry, as not all will be based on state laws in place. These types of loans often have a streamlined loan application process and varying rates. Make sure to do your due diligence and compare all terms and rates carefully before signing anything.
4. Apply for a personal loan
This financing option will depend on the company you apply to. Many business ventures are started with a personal loan as some don’t worry about how you are using the money, however, many do care and won’t let you have a loan for business reasons under the guise of personal money. You will need a credit score of 700+ to get a personal loan. Watch for the interest rate you are being charged as they will vary from place to place.
5. Use knowledgeable resources in conjunction with lending applications
Use an accountant and lawyer who is versed in the cannabis world of legalities to set up your business legitimately. This will help lenders see it in a favorable light. Have a bank account with the business name, keep detailed accounting records to show gross sales, and if you are a startup have a good business plan. This is all needed if you are going to approach lenders. It is a must when you are looking for cannabis financing.
6. Funding from an investor
There are cannabis-focused hedge funds that pool money from people who are interested in investing in cannabis opportunities. There are also angel investors as well as venture firms.
If you choose to go this route, having the proper documentation from your accountant and lawyer is important. Have your business plan detailed and complete and be ready to have your financial projections ready and clearly stated. Be professional and prepared. Investors want to feel reassured they are investing well and that those looking for the funds are going to not only repay the money but offer a return on investment as well.
Finding cannabis financing is not as easy as financing many other mainstream businesses. Whether you want to finance a current business or a startup, it is important to create and follow your own cannabis financing guide. Go forward well prepared so whichever form of financing you decide to go with, your business shows it is legitimate, well prepared, and professional.
Unfortunately, cannabis businesses are held to a higher threshold than many other businesses when it comes to accountability. The newness of the marketplace, the legalities, and the chaos that 2020 has brought to the markets mean cannabis businesses have to have a solid business plan in place with staff to make it happen. Pick the financing option that is best for the business and go after it. With a solid plan and smart business acumen, financing may not be as problematic as you think.