Whether you are starting a new cannabis business or expanding an existing venture, there will probably come a time when you need some additional financing.
Despite the majority of states legalizing some form of medical or recreational marijuana, hemp, and CBD products, securing loans for your cannabis business remains a massive challenge. As cannabis is still considered a Schedule I drug under the federal Controlled Substances Act, banks and many other financial institutions do not extend banking and financing services to cannabis business owners as they do for other small businesses. Cannabis businesses remain locked out of the formal banking system, making it challenging to access timely financing.
Finding the right cannabis financing can be extremely frustrating and time-consuming. To help you overcome this challenge, we’ve put together this handy finance toolkit for businesses in the cannabis space, including all that you need to know about finding, applying for, and securing an easy canna loan.
Do Not Wait Too Long to Secure Financing
If your business is struggling financially, it reduces your chances of securing funding. Ideally, the right time to apply for cannabis financing is when your finances are strong and your business is growing. This way, the amount you receive can be used to expand your business instead of rescuing the company from a financial trap.
Road Map for Cannabis Financing
1. Maintain Your Paperwork
Managing a cannabis business involves plenty of paperwork. You will need to maintain meticulous records and accounting documents to track your expenses and revenue, calculate your profitability, file taxes for your cannabis business, and apply for cannabis business loans. Here are four primary documents that all cannabis business owners should regularly maintain:
- Balance sheet: This provides a snapshot of your business’s financial standing by listing all assets, liabilities, and equity. It showcases the net worth of your business to potential lenders.
- Income statement: Also known as the profit-and-loss statement, this summarizes your business’s revenue and expenses over a year. It helps identify your business’s break-even point, showing your profitability.
- Cash-flow statement: This reflects the inflow of revenue and outflow of expenses. You generate your inflow by selling goods, providing services, and receiving payments for those goods or services. The outflow occurs due to inventory or equipment purchases, payroll, marketing, and other overhead expenses.
- Revenue forecast: This is an educated guess of how much money your business will generate in the upcoming year. The more realistic the revenue forecast is, the easier it is for you to stay under budget.
2. Understand the Different Types of Cannabis Financing
Some of the flexible financing options that are available to cannabis business owners include:
- Lines of credit
- Inventory financing
- Purchase money financing
- Invoice financing
- Dispensary financing
Understanding the features, eligibility requirements, pros, and cons of these different financing options can help you choose the one that best fits your business requirements.
3. Prepare a Business Plan and Loan Proposal
Lenders usually want to know how you plan to use the loan money and may require you to submit a detailed business plan explaining your business goals and objectives. Besides checking your financial statements, some lenders may require cannabis business owners to submit a loan proposal explaining the loan’s purpose and the repayment plan. These documents help establish your business’s credibility, increasing your chances of securing the loan.
4. Build Your Credit Score
Lenders often check the applicant’s credit score before approving the loan. Work on bumping up your credit score by focusing on the basics. Pay off any outstanding loans or credit card bills along with any overdue penalties. Build your credit history by paying your bills on time and staying well within your credit limits.
5. Save for a Down Payment
If you’re planning to open a cannabis dispensary or cultivate weed, you’ll need to save as much money as possible to invest in your business. A large down payment establishes your financial credibility and also increases the lender’s confidence in you and your business.
6. Know What the Lender Is Looking For
Before you start searching for cannabis lenders, you must be aware of the funding criteria. Here are a few factors that lenders consider before approving a loan:
- Liquidity and cash on hand
- Age of the business
- Borrower’s credit score
- Current debts (if any)
- Capital contribution
- Business assets and collateral
- Experience of the team and sponsors
Knowing what the lender is looking for can help you focus on these factors, improving your chances of securing loan approval.
Alternative lenders like Bespoke Financial offer immense support to aspiring cannabis entrepreneurs. Whether you’re a cultivator, manufacturer, retailer, or dispensary owner, you can visit the Bespoke Financial blog to learn more about the latest financing trends in the marijuana industry and apply for the right funding solution for your cannabis business.