Many small business owners sometimes have to work hard to manage cash flow to ensure that operational and maintenance costs are covered, payroll is made each month, and there is plenty of new inventory in stock for customers. Cannabis business owners aren’t unique in facing the challenge of managing their cash flow, but they do face major obstacles in obtaining financing and banking services when compared to other types of small businesses. Due to federal regulations that limit the opportunities for banks, credit unions, and credit card companies to work with cannabis businesses, cannabis business owners must learn to operate on a primarily cash basis. That means that payments must be made with cash physically on hand, and for years, cannabis business owners had no available line of credit to use to cover cash flow gaps if needed. If their inventory doesn’t sell quickly enough, cannabis business owners can experience working capital strains and limited business growth as a result. Inventory financing offers a viable opportunity for business owners looking to prevent cash flow interruptions.
What Challenges Do Cannabis Business Owners Face When Seeking Financing?
Recreational cannabis might be legal for use in 11 states and medical cannabis might be legal in 33 states, but that doesn’t mean that cannabis business owners have an easy way to find financing. No matter how legal cannabis might be in an individual state, the substance remains a Schedule I controlled substance at the federal level (meaning it’s illegal), which means that getting financing through a traditional financial institution, such as a bank or credit union, is nearly impossible. Regulations surrounding illegal substances and activities mean that federally insured financial institutions cannot legally handle capital that is connected to cannabis. Cannabis business owners heading to their local banks or credit unions will find that it’s not only impossible to receive a small business loan from a traditional financial institution,some credit unions in legal states such as Colorado, CA, WA, etc. do actively bring on cannabis operators so I’m not sure if you want to mention that or just not be so adamant about the fact it’s not an option. They usually don’t provide lending services so these are not competitors to Bespoke but usually are partners.. It’s not just open lines of credit and credit cards that are off-limits, either: banks and credit unions are subject to the same regulations around money laundering that individuals are, so these institutions also cannot provide real estate or equipment loans; any money connected even tangentially to cannabis is prohibited. All banks are also 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. With credit cards off-limits due to the aforementioned regulations, cannabis business owners primarily conduct their operations in cash. This means that in addition to struggling to find financing, cannabis business owners also have to take additional precautions to find storage for their cash while still keeping enough money on hand to pay bills. With all of these roadblocks, finding financial services can feel overwhelming to cannabis business owners. Thankfully, since 2018, commercial lenders specializing in cannabis business loans, like Bespoke Financial, have stepped up to fill the funding gap facing cannabis business owners, so options for financing do exist.
What Is Inventory Financing?
Inventory financing is a short-term loan or revolving line of credit that is backed by assets – specifically, your business’s inventory. Inventory financing allows companies to purchase products using a capital advance from the lender directly to their vendor, and these same products act as collateral if the business owner is unable to sell the projects and repay the loan. Cannabis business owners sometimes struggle to meet their cash flow needs because their suppliers may require payment in a shorter time period than it takes to sell their products to the customer. There are two main types of inventory financing: inventory loans and inventory lines of credit. When using an inventory loan, the business owner receives a loan based directly on the value of their inventory; the loan can only be used once. Under an inventory line of credit, extra money is available on an ongoing basis, helping business owners cover unexpected expenses. Typically, lenders provide inventory financing for only a portion of your inventory’s value rather than the full appraised value. This is because inventory depreciates in value and is less liquid than accounts receivable (such as money you are owed from customers), making it less likely to be sold at the full value of the product.
What Are the Steps of Inventory Financing?
There are four main steps of inventory financing. The steps of inventory financing are as follows:
- Vendor ships the product to the business owner and issues an invoice due in 30 days.
The business owner requests financing. - The lender sends an advance of the entire invoice amount to the vendor.
- The business owner sells the final product.
- The business owner pays the invoice amount plus accrued interestto the lender.
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.
What Are the Benefits of Inventory Financing for Business Owners?
There are many benefits of inventory financing that make this type of financing attractive to cannabis business owners. First, 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. Because inventory financing is secured by the value of your inventory as collateral,, making it easier to get than some other types of loans. By having your lender pay your vendors directly, you’re able to get cash-on-delivery (COD) pricing, helping you save money and grow your business. Additionally, many vendors offer volume based discounts on packaging and things of that nature which allows the business to achieve economies of scale. Since you’ll be paying your invoices on time, you will be able to maintain positive vendor relationships and build a strong reputation in the industry as a trustworthy business partner. Flexible financing is also available through the inventory financing model.
What Are the Benefits of Inventory Financing for Lenders?
Inventory financing is truly a “win-win” for business owners and lenders. Because inventory financing is secured by the value of the inventory as collateral, lenders have less risk associated with this type of financing than other models. This allows lenders to work with business owners who may have a less than perfect credit profile and build up a relationship over time. As the business grows, the business owner may be increasingly able to meet their financial obligations and will turn to the lender time and time again for additional financing opportunities, creating a long-term working relationship. There is also less risk associated with inventory financing loans because these loans are generally short-term and are likely to be paid back on time.
Who Should Consider Inventory Financing?
Inventory financing is an excellent option for cultivators, distributors, manufacturers, cannabis brands, dispensaries, and ancillary cannabis companies that are looking for flexible financing that can help build strong vendor relationships and demand lower prices. Only businesses that are selling well and who are in need of additional cash flow to keep selling should consider using inventory financing. Inventory financing should not be used if you have slow turnover and your products are selling slowly, as you may not be able to make payments on your financing.
Where Can I Get Inventory Financing?
Recognizing the business opportunity that has arisen since the decriminalization movement for cannabis began, commercial lenders like Bespoke Financial have started operating specifically to address the needs of the growing cannabis business community since traditional financial institutions are unable to provide financial services. Cannabis-specific lenders fully understand the financing and banking challenges faced by cannabis business owners and are more likely to offer industry-appropriate financing options, including inventory financing and factoring, as compared to traditional financial institutions. Although cannabis businesses still occupy a legal grey area that most lenders won’t touch, cannabis business lenders understand how to provide financial support in a way that still ensures compliance with federal regulations. When speaking with lenders, be sure to explain your financing needs and ask for guidance in choosing the loan product that is right for you. You need to do your due diligence when looking for a lender and discuss things like interest rates, the repayment term, and the amount of your monthly payment.
What Do I Need to Apply for Inventory Financing?
The application process will vary for each financing company. Because inventory financing is based on the likelihood that your inventory will be sold in the near future, some lenders will request evidence of your business’s sales history, profit margins, sales projections, annual revenue, and business tax returns. A strong inventory management system is also a plus because it provides evidence that you are not purchasing more inventory than you truly need or can realistically sell. Remember, cannabis lenders might be focused on a non-traditional industry, but they’re still businesses, which means your finances will need to be on the up-and-up when you apply for a loan. Your lender will want to review your financial records (balance sheets, income statements, and bank account statements), your credit risk profile, and capital needs. Lenders who cater to the cannabis industry may also want to review a list of your key management personnel and a list of all active cannabis licenses held.
