Dispensary Loans: What are they and how do they work?

Looking to start a cannabis dispensary for recreational or medical marijuana in your state? You’re not alone! Eleven states have now legalized marijuana for recreational use and 33 states have made medical marijuana use legal, leaving eager business owners ready to get in on the action and join this booming industry. If you’re interested in opening a dispensary, you may have heard about some of the challenges associated with financing a cannabis business. While there are some difficulties that traditional businesses don’t face, it is possible to get a dispensary loan for your business.

What is a dispensary loan?

Cannabis business owners who are looking to start a dispensary face a unique set of challenges when operating their business; dispensary loans are designed to help with these issues. In addition to all of the normal costs associated with starting a business (like utility bills, rent, purchasing inventory, and more), dispensaries must also plan for additional expenses to keep their cash-based businesses protected, like high tech security systems, armored cars to transport their cash, and more. You’ll also need to consider licensing fees, which can be in the tens of thousands of dollars, and hire staff.  Dispensary loans are designed to help retailers manage their cash flow, keep their shelves fully stocked, regulate their payroll, and reach new markets with marketing efforts. 

Where can I get a dispensary loan?

If you’re thinking about walking into your local big bank or state credit union, think again. Traditional financial institutions are regulated by the federal government, which views transactions connected to cannabis as illegal activity. At first glance, it might not make any sense – after all, cannabis is legal in your state, right? While that is true, it’s still considered a Schedule I controlled substance at the federal level, which means handling transactions associated with cannabis is illegal for banks. Not only are you unable to store your business’s assets at your local bank, they also cannot offer you a loan. Banks are subject to the same regulations around money laundering that individuals are, so traditional financial institutions are on the hook if they handle money associated with cannabis businesses at all. It may be possible to work with a local or state-chartered bank or community credit union, but all banks are subject to a regulation called the Bank Secrecy Act that requires banks to flag transactions of 5,000 dollars or more that may be associated with illegal activity, including cannabis sales. This is one of the major obstacles facing cannabis business owners, no matter how loosely related to cannabis their activities might be. 

While you’re not going to have any luck at your local credit union, it is possible to use a commercial lender to finance your cannabis business if you know where to look. The first licensed commercial lender focusing on the cannabis industry was founded in 2018, so this option is relatively new. Prior to 2018, most companies relied on hedge funds and angel investors to help finance their businesses, but today, there are more options.

What type of financing options are available to cannabis business owners?

Financing options, including debt funding and equity funding, are available to cannabis business owners. Debt funding usually involves financing your business by taking out a loan or using a business credit card, thereby acquiring debt that is then paid back with interest. Equity funding involves offering shares of the company in exchange for capital. Rather than being paid back at regular installments like a loan, the investor receives their money back in the form of dividends or profit when the business is sold. Equity funding is only available to companies that already exist and hold value, so companies that are just getting started will generally use debt funding to get off the ground. Dispensary loans generally fall into four different categories: private loans, real estate loans, equipment leasing loans, and dispensary cash advances. Inventory financing and invoice financing are also available.

Private loans

Commercial lenders offer private dispensary loans with rates of between 8 and 25 percent. Lending terms are generally from one to three years, and funding is typically available in seven to fourteen days. While private loans might sound like a great option, lenders are sometimes unwilling to work with dispensaries unless they have a proven record of revenue. 

Real estate loans

You need a place to put your dispensary, right? If you’re looking for real estate in which to house  your business, a real estate loan may make the most sense for you. Bridge loans, hard money loans, and shorter-term mortgages are all available to cannabis companies and medical marijuana dispensaries. Interest rates typically range from 8 to 20 percent and terms are 1 to 5 years in length. Funding takes approximately 30 to 60 days to obtain from the time of application. 

Equipment leasing

Special financing is also available for dispensaries who need to purchase equipment for use in their building. Equipment leasing is a popular option for business owners who need equipment but do not want to purchase it outright. The leases typically hold interest rates of between 8 and 20 percent and are funded over 1 to 7 years. Leases are available in five to fourteen days. 

Cash advance

It can be difficult for dispensaries to find funding, so cash advances are sometimes the best option. Cash advances are not a loan, and in order to receive one, the dispensary will need to show strong revenue. Factor rates vary from 1.30 to 1.49, and terms vary from 4 to 12 months. You’ll get your money in just one or two days, so if you need quick cash on a short-term basis, it may be a good option. However, cash advances are typically the most expensive way to fund your business, so they should only be used if you don’t have other options.

What is invoice financing?

Invoice financing can help dispensaries waiting to receive payment on an open invoice. Because business owners often have to wait between 30 and 90 days to receive payment on an open invoice, cash flow lag is common. Invoice financing is a type of loan that offers partial repayment on outstanding invoices. Using this type of financing, you’ll only accrue interest when you use the funds, and you can borrow for up to 90 days. Fees are approximately 2.5 to 3.5 percent of the invoice amount and are assessed every 30 days. The steps of invoice financing are as follows:

1. An invoice is issued to the cannabis business owner for goods or services. The invoice is due in 30 days and the business owner requests invoice financing.
2. A percentage of the invoice amount (approximately 80 percent) is deposited directly into the invoicer’s account from the lender.
3. The business owner uses the funds to increase production and profits. Financing fees accrue during this time until the invoice is paid in full to the lender.
4. The invoice is paid in full to the lender, who completes payment to the invoicing company minus accrued fees.

What is inventory financing?

Inventory financing is an excellent option for dispensary owners that want flexible financing so they can build strong vendor relationships and demand lower pricing. Under the inventory financing model, vendors are paid directly and interest only accrues when you use the funds, which can be borrowed for up to 90 days. Fees are approximately 2.5 to 3.5 percent of the invoice amount and are assessed every 30 days. Unlike invoice financing, which uses open invoices as collateral, inventory financing is a short-term loan that is backed by assets – specifically, your business’s inventory. Your lender will pay your vendors directly, allowing you to request cash-on-delivery (COD) pricing, which will help reduce costs and increase  your profit margin. Inventory financing is beneficial because it helps balance out your business’s cash flow and provides funds that can be used to purchase more inventory or pay for other expenses. The steps of inventory financing are as follows:

1. Vendor ships product to the business owner and issues an invoice due in 30 days.
   The business owner requests financing.
2. The lender sends an advance of the entire invoice amount to the vendor.
3. The business owner sells the final product.
4. The business owner pays the invoice amount plus accrued interest and fees to the lender.