Tips For Financing Your Cannabis Business

By now it’s no secret that cannabis is big business. Many fast-growing and lucrative start-ups are now reaping the rewards of working in the new and emerging cannabis industry, creating wealth for themselves and contributing huge tax revenue that benefits their state and local communities.

Americans have a huge appetite for marijuana, so savvy entrepreneurs are currently helping meet this demand through a wide variety of cannabis business ventures.

A “cannabis business” is essentially any enterprise that serves the cannabis industry, whether it touches the plant or not. Dispensaries, cultivation operations, and infused-product manufacturers are the most obvious examples of cannabis businesses, but a plethora of other companies serve the industry as well.

Some of them include business consultants and advisors, phone app and software developers, staffing agencies, marketing and communications companies, lighting manufacturers, architects who cater specifically to dispensaries and cultivation centers, security companies, publishers, packaging companies, soil producers, nurseries, and many others.

With the cannabis market being so hot, lots of people want to jump on the cannabis bandwagon. As with any industry business venture, the best companies will prosper and the weaker ones will fall by the wayside.

With competition growing fiercer each year, a solid business plan is mandatory for those who expect to stay in business in the current environment.

Unfortunately, despite the strong business forecast for the cannabis industry, entrepreneurs looking to obtain seed capital (pun intended) and other loans for business operations run into roadblocks when going through traditional methods for funding.

Finding the necessary money can be a difficult task. Since cannabis is still officially illegal at the federal level, big banks are unable to provide loans and do business with cannabis companies, regardless of whether or not those companies have compelling business plans.

Obtaining Cannabis Business Funding

Unless you are independently wealthy or have generous family members, you will have to get creative when planning to launch your cannabis company. Fortunately, there are alternatives to banks when it comes to securing venture capital.

A number of angel investors are keeping an eye on the cannabis space, looking to provide lucrative financing or become a passive business partner. Other loan options are available as well, several of which are discussed below.

If you have a great idea for the next great cannabis business, they’re willing to listen and consider your needs—consider them part of the “Shark Tank” of the cannabis space. If you company cannabis business plan is compelling enough, the money is there.

Networking or presenting your business idea at some of the larger cannabis expos and conferences can be a good place to begin. The organizers of some cannabis business events have special programs and schedule presentations for those seeking business loans.

There also are financing companies that specifically serve the cannabis industry. These companies provide financing for worthy cannabis entrepreneurs. Cultivate Financing and Diamond Business Loans are two such companies that are there to help your new business prosper in the sometimes-uncertain cannabis space.

Diamond Business Loans has funded a wide range of cannabis businesses, including those relating to cultivation, retail sales, concentrates, distribution, app development, delivery services, accessory production, software development, and security.

Because cannabis is classified as an illegal narcotic by the federal government, financing a cannabis business might be difficult.

Cannabis companies find it challenging to get standard bank loans and financing because of this classification. Nonetheless, cannabis companies have access to a variety of different funding sources.

The following are some of the most popular methods for funding a cannabis company:

Personal Loans: Cannabis company owners may be eligible for personal loans from some banks and credit unions. Usually, only companies with excellent credit and a solid track record are eligible for this.

Home Equity Loans: Another way to get funding for your cannabis company is to use the equity in your house as collateral. If you have a lot of equity in your house, this can be an excellent choice.

Angel investors are those who make early-stage business investments. They frequently seek out companies with significant growth potential, so if they have faith in the future of cannabis companies, they might be open to investing in them.

Venture Capital: Professional investors who make high-risk, high-growth business investments are known as venture capitalists. Generally speaking, they are only eager to invest in cannabis companies that have a solid business plan and a seasoned team.

Cannabis-Specific Lenders: A variety of lenders focus on funding firms involved in the cannabis industry. Because of their experience in the market, these lenders are frequently more risk-tolerant than regular banks.

Financing for Equipment: If a firm needs to buy expensive equipment, such software for a dispensary or cultivation apparatus, financing for equipment can be a smart alternative. With this kind of financing, you can pay for the equipment gradually.

Selling your invoices to a factoring company at a discount is the practice known as invoice factoring. If you are waiting on customers to pay their invoices, this can give you an instant cash flow that can be useful.

Crowdfunding: This is an approach to raise capital from a big number of contributors. For companies with a devoted clientele and a strong social media presence, this may be a wise choice.

Here are some more suggestions for funding a cannabis company:

Make early plans. It is best to begin preparing for your finance requirements as soon as possible. You'll have more time to compare prices and terms as a result.

Possess a solid company strategy. Your company's objectives, plans, and financial projections should all be spelled out in detail in your business plan. This will assist you in drawing in possible lenders and investors.

Create a powerful team. When it comes to financing your business, having a staff with knowledge in the cannabis sector will be important.

Be ready to pay interest rates that are higher. Since cannabis companies are regarded as high-risk investments, borrowing costs will probably be greater than for conventional companies.

Look around to find the best conditions and costs. Cannabis businesses can choose from a variety of funding sources, so be sure to compare prices and conditions.

Seek legal counsel. It's crucial to consult a lawyer before making any financial decisions regarding your cannabis company. Understanding the legal ramifications and hazards associated with various funding methods might be aided by legal counsel.

Common Cannabis Loans

The range of cannabis loans cover all aspects of business, from initial funding to real estate procurement and development to business operations. Other types of loans offered by Diamond Business Loans and Cultivate Financing specifically include:

Startup Funding

This is one of the most common types of cannabis business loans, and there are a range of business startup loan options, with a variety of financing options.

Real Estate Financing

Every cannabis business needs a location. Real estate loans provide the capital for purchasing the land or the commercial property to set up and develop a base of operations.

Revolving Lines of Credit

Daily operations of businesses include a range of unexpected products or services, so a limited pool of finances provides flexibility for typical ongoing costs.

Bridge Loans

Sometimes necessary for expansion along with a revolving line of credit, bridge loans are typically short-term loans to finance expansion of a business.

Working Capital

Loans for working capital are used for ongoing daily operations expenses. These operations expenses can quickly add up, requiring specific funding.

Inventory Loans

A good dispensary requires a selection of well-stocked products, ranging from flower, concentrates, topicals, and edibles to smoking and vaping devices and ancillary textiles and branded novelty items.

Equipment Financing

Cannabis-related equipment can be extremely expensive. Whether it’s equipment relating to cannabinoid extraction, trimming, security, or business software—most of it created specifically for the cannabis industry—a business requires these assets to stay current with standard industry processes.

Common Loan Sources

The money required for a startup cannabis business can come from a range of sources, from family and personal acquaintances to financial institutions and investors. The range of providers includes:

• Crowdfunding. Entrepreneurs starting a new company can legally borrow $2,000 from individuals interested in receiving a stake in the company in exchange.
• Alternative Financing Loans. The types of loans come from financing institutions like Cultivate Financing and Diamond Business Loans, which have a specialized niche serving the cannabis industry and other types of businesses.
• Private Equity Firms. These firms may be willing to offer you short-term, high-interest loans for a high stake in your cannabis company.
• Home Equity Loans. Homeowners can secure business loans by borrowing against the value of their homes.
• Personal Loans. For loan seekers with solid credit histories, a personal loan may be a good way to finance a new cannabis start-up company.
• Angel Investors. These types of investors loan money to help small businesses get started and grow. If you plan to provide a valuable product or service, they may be willing to provide limited funding.
• Venture Capitalists. Similar to angel investors but often willing to provide more money, venture capitalists exist in every industry. These wealthy investors are often willing to help small businesses grow in exchange for equity.

Loan Eligibility

Whether or not an entrepreneur qualifies for a loan usually depends on meeting certain criteria. Whether the loan comes from an angel investor, venture capitalist, private equity firm, or another source, meeting the following common loan prerequisites will help a cannabis company secure financing.

• Is it legal? This may sound like a silly question, but a cannabis company must exist in a state where its activities are legal. Compliance is always key to business success. Laws vary widely by state, and a cannabis enterprise that’s legal in one state may not be in another.
• Do you have a solid business plan? Every business venture requires a solid plan. Loan providers will consider every aspect of your business to ensure that their loan will be put to good use and generate money.
• Do you have good credit? Loan providers are much more willing to fund companies backed by owners with good credit. When looking for business loans, your credit score should be reasonably good.
• Has your business been in operation for at least six months? Your chances for securing a loan for development and expansion are greater if you have a track record of having an established business.
• Do you have gross monthly sales of at least $10,000? Being able to show that your startup business has been able to generate income goes along way toward proving its potential to an investor.
• Can you pass a background check? If you haven’t been convicted of a felony and can pass a background check, you are much more likely to receive a loan.
• Is your business incorporated as an LLC, limited company or S corporation? Setting up your company correctly to protect yourself is important during the loan application process.
• Do you have a business bank account? No one operates a business using his or her personal bank accounts. Your business requires separate bank accounts for myriad reasons.

If you can answer yes to all of these questions, you stand a good chance of receiving financing to launch or grow your business. Although cannabis companies often need to be more creative than other businesses when seeking loans, a wide range of options are available.

The cannabis industry is one of the fastest-growing industries for a good reason: There is a high demand for related products and services.

With a strong work ethic, careful planning, and a solid business plan, a cannabis business will most likely succeed.

Money is available to new business owners from a variety of sources, so do your research and secure your financing. Success is on the horizon!

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