What Are The Criteria For Obtaining Cannabis Business Loans?

The legal cannabis industry is very new and was already in the ‘bear market’ before the coronavirus shut down economic activity across the globe. The shock caused to this industry may be felt even harder than most, mainly since this industry is ineligible primarily to receive the prodigious amounts of federal government aid being doled out to small businesses. Many cannabis businesses, like those in Colorado, that have had supply chains demand or both interrupted are desperately seeking funding or business financing to stay afloat. Unfortunately, many of these businesses will become absorbed in a wave of consolidation or will ultimately fail. The more durable and more versatile companies that have benefitted from record demand for cannabis products as lockdowns were implemented, on the other hand, might need financing to keep up with the unparalleled uptick in American and Canadian cannabis purchases. 

The current economic environment, particularly for small businesses, is as bad as it perhaps has ever been. It is difficult for many firms to provide the forecasts of future activity and sales when there is minimal certainty as to when economic activity will be legally allowed to proceed, and even if it is when consumers will willingly spend at pre-pandemic levels.  This, in turn, makes it exceedingly difficult for alternative lenders to extend credit responsibly. The US government, via the Treasury Department and the Federal Reserve, has implemented extraordinary policies aimed at providing financial support to small businesses. However, none of that support will likely be available to cannabis businesses. 

While some businesses cannot determine when they will next have revenue, some companies are struggling to find financing for capital expenditure to finance catching up to booming consumer demand. Many businesses in the legal cannabis industry may be faced with this excellent variety of coronavirus problem as opposed to the previously mentioned bad one. This is because, in a massive victory for the industry, in most jurisdictions where cannabis is legal for medical marijuana or recreational purposes, it was deemed an essential sector for consumers. This forced a rapid change in consumer behavior that created an opportunity for those companies agile and flexible enough to respond to it successfully. Companies in the legal cannabis industry who are experiencing an unexpected windfall may not know how to get the best financing that can expand the fruits of that windfall and turn it into permanent brand gains. 

This is why, if you are a cannabis business operating profitably, there actually may be more financing opportunities than you think. 

Lending Landscape For Cannabis Businesses

Cannabis is one of the fastest-growing industries in the United States. However, given the fact that the product is still illegal under the Controlled Substances Act (CSA), the regulatory hurdles for many cannabis firms to participate in the mainstream financial and bank account channels are too great to clear. Since cannabis is still illegal under the CSA, federally regulated financial institutions (which include all banks and credit unions in the United States, as well as any domestically operating foreign subsidiaries) cannot provide financing or loans to these businesses under most circumstances. Despite 2019 FinCen Guidance that provided some additional clarification to financial institutions, most federally insured depository institutions (credit unions and banks) still demonstrate a firm reluctance to engage in any relationship with businesses that derive profits from a federally prohibited substance. However, there are still options for obtaining cannabis business loans. Let’s make sure you have your ducks in a row first. 

Key Things Needed For Cannabis Business Loans

  1. Know The Lender You Are Applying To: One of the most important things you’ll want to do before preparing for a small business loan is to do your due diligence on the lender and what criteria are essential to them. Just like with a new credit card, sometimes they will tell you directly the requirements they are looking for such as historical financials, business projections, or specific interest rate terms, and sometimes you will have to infer it for yourself if you can find information on applicants who were approved. Talking to the lender before a meeting to glean their expectations can be helpful if you get through the initial phases of web-form, or paper applications. 
  2. Gather All Documentation: It is imperative to have all your necessary documentation before you begin discussing the possibility of a loan. Remember that a lender is giving you money based on the revenue you must convince him you’re going to have. There truly is no better indicator of future performance than consistent documentation of past performance. This is true, often even of companies that operate at the highest level and market caps. Make sure you’re not giving wild projections that are overly optimistic or not based in fact. Remember, these guys do this for a living, and if you walk in with materials that are unconvincing or inaccurate, they will most likely be able to sniff you out and show you the door quickly. If they could not do this, they would probably be bankrupt and not have any money to offer you in the first place.
  3. Decide Which Type Of Loan And Which Loan Terms Best Fit Your Needs: It is not always the best decision to take out the largest loan which you qualify for. Making the right decision here is just as crucial for the borrower as it is for the lender. As a borrower, you want to get the best possible terms you can accept while also holding sacred your end of the covenant that is a loan. In other words, you want beneficial conditions, but you do not wish to agree to anything that you do not think you can realistically payback. If you feel you’re getting over on somebody and getting more money than you deserve, you probably should not take the loan. Do you want a loan to finance a capital expenditure or piece of vital equipment to streamline your supply chain? Come up with the case for it. How much will it save you? Is that enough to service the debt you are incurring to get the loan?
  4. Regulatory Certainty: Cannabis is a highly regulated industry, and despite the common notion that the only reason it is hard for cannabis businesses to get loans because of Federal Law, there is a lot more to it than that. Several high-risk industries have been shunned by the banking industry who have products that are not illegal under Federal Law such as firearms and ammunition sellers, payday lenders, and other types of transactions they may pose an elevated risk to the financial institutions involved. If you are a cannabis business owner and are not 100% compliant and squeaky clean in all your endeavors, then you will likely be disqualified before starting, and you won’t be able to blame Federal drug policy for it either. Cross your t’s and dot your I’s. If you don’t have the expertise you need, it is a lot cheaper to pay for it today then to fix the consequences of winging it. Remember this was all illegal only a few years ago, approach the privilege to operate legally with a little enthusiasm! Don’t take shortcuts and make sure to play all applicable state and local taxes. 
  5. Build Consumer Good Will: Nothing will get you to the finish line in the financing, like having consumers who love your product. A million small companies are buying premixed oil and terpene flavors and throwing cartridges together in a flashy box to make a quick buck. The only time consumers purchase products like this are when they are marked down. These are the most likely to fall. Make sure you respond to both positive and negative consumer feedback. Monitor consumer trends, ensure your quality control process is exemplary, and always rely on lab testing so you can demonstrate exactly what you’re giving your consumers.

Use Specialty Cannabis Lenders When Possible

The cannabis industry, in no small degree, is in a state of exile on Main Street from the financial system. It is challenging to obtain a loan from a federally insured depository institution. That’s why players like Bespoke Financial offer innovative, fair, and conventional business funding options to marijuana businesses or a marijuana dispensary that treat them like any other business. Whether you need to find a lenderto finance the purchase of your marijuana inventory on the production end of the process or you need a lender to purchase marijuana-based real estate, Bespoke is the right place to go. They also provide competitive working capital lines of credit in the range of $250,000 – $5 million.. Working with an actor like Bespoke Financial can give you access to the investors who want to invest in hemp, marijuana, and CBD. This can save you a lot of time in search costs. When producing revenue is more vital than ever, save some time by using experts.

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