How To Finance Your Cannabis Business

finance your cannabis business

Finance Your Cannabis Business

One of the keys in owning a successful cannabis business venture and marijuana related business, aside from having experience, connections, and sheer willpower, is having the right amount of capital and financial backing to make your company a successful one. We will explain how to finance your cannabis business.

The business will have expenses to pay for, and without the seed capital and future capital to make those payments in the beginning or throughout its course, the company growth will be delayed and the potential revenue that the owners and shareholders are supposed to receive from that business will also be delayed.

Every business in this industry has a risk present – whether it’s legal issues, employment issues, unforeseen forces of nature etc. – diversifying that risk can be mostly solved with the addition of working capital to prepare for and overcome any obstacle along the journey.

That is why it is important to know what your options are in obtaining capital and financing to finance your cannabis business or startup business and expand your growth at a faster pace.

Here are a few ways you can finance your Cannabis Business:

 

  • Equity Financing

    • This method involves the you as the borrower giving up a portion of your future revenue in order to repay the borrower money. This also involves giving up shares and stocks in your company to an investor for a specific amount of borrowed money. This can be good and bad depending on the business model and business plans for the future. Businesses who give up equity run the risk of diluting their ownership of the company and therefore losing control over the company. The reason why is because shares are limited within a company so the borrowers must be cautious when giving up equity to build funding for the business.

 

  • Debt Financing

    • This method involves the borrower taking on debt in the form of a loan or line of credit to borrow funds from a bank/lender/investor in exchange for repaying the debt with interest and fees on an agreed upon terms and timeline. This form of financing is most popular based on this industry’s profit margins and profitability turnaround times

Which form of financing should you choose to finance your cannabis business?

 

That depends on your business plans and what you need done in exchange for what you are willing to give up.

Let’s take a cultivator and a manufacturer as an example. An indoor harvest cycle for growing cannabis typically ranges from 8 to 10 weeks when done indoors. (Indoors are also efficient in creating consistent batches of cannabis products to supply the demand within the market place.) Consistency is key in scaling larger operations and eliminating variables and errors within the supply chain. A cultivator’s harvest times can produce 5-6 harvests a year. Each harvest produces a certain number of product to manufacture into more products and/or wholesale to a distributor with a sales channel already setup to supply the demand in the retail market place to consumers in legalized states and cities within the US. Every harvest provides an opportunity for revenue to be created by selling the products from the harvests to meet the demand in the wholesale and retail markets. This turnaround time would easily allow a business owner to take on certain debt financing instruments to repay any startup costs incurred within their initial business plan such as equipment, inventory, payroll, legal fees, real estate, utilities, etc., before they expand into higher levels of financing and operations.

Let’s breakdown the areas for what you can get debt financing and a loan or line of credit approved and based on:

 

Cash : this can be defined as the present and future Revenue and Sales from the business as shown through the deposits and available balances on the Bank Statements, along with the Financial Statements and Tax Returns of the business and person(s).

Collateral : this can be defined as a something tangible than can pledged as security for repayment of a loan, to be forfeited in the event of a default for example Real Estate Property is the most common form of collateral.

Credit Score: a number assigned to a person that indicates to lenders their capacity to repay a loan. Credit scores typically range from 300 (poor) to 850 (Excellent).

Now that we understand how to get approved for a cannabis business for debt financing, let’s examine the types of debt financing options available in the lending market to finance your cannabis business.

Startup funding is almost non-existent in the traditional banking industry. Traditional banks and Lenders will typically only approve a business loan or line of credit for roughly 10-20% max of the yearly gross revenue that the business made the year before. –Almost every major savings and loans bank in the US.

Here’s how the process normally looks like to finance your cannabis business:

You walk into a bank and ask for a business loan. The banker starts building your offer and begins to ask questions and information about you and your business to qualify you for one of their loans. Traditional bank loans are more restrictive in their underwriting guidelines, meaning they want to see more in-depth analysis of the borrower’s financial profile.

For Amounts less than $100,000, most banks and lenders follow these underwriting guidelines to approve a Term Loan or Line of Credit application:

  • The process usually takes about 3 months to underwrite
  • A sound business plan showing the opportunity, the target market, the business model, a marketing and sales strategy, the competition, a financial analysis with projections for the near and far future, background of the team of owners and staff and their experience, implantation plan with an outline for the timeline of events.
  • 2 years personal and business tax returns
    • They require at least 1 year showing profit
  • 6 months of Bank Statements to show liquidity and the power to repay the loan within the first initial time frames
  • A Profit and Loss Statement to measure all the expenses and revenues of the business
  • A Balance Sheet to measure and show all assets, liabilities, and owner’s equity or stockholder’s equity. This is very useful in determining the amount of the company’s working capital
  • A Personal Financial Statement to list a schedule of all the owner’s assets and liabilities
  • Good personal FICO Credit Scores to show the borrower’s character and credit history in repaying any debts in the past and present
  • A clear measurement of your Debt-to-Income Ratio. This is a useful strategy in measuring and determining how much money you have left over after you have finished paying all your obligatory bills and have leftover money available to spend for repaying a new loan that you are considering to take on to expand your business.

The same underwriting guidelines can be applied for amounts higher than $100,000 including the requirement of having a minimum percentage amount of cash reserves to have available from borrower’s own bank account at all times.

Once all these requirements for underwriting have been met and satisfied, these banks and lenders will typically approve a credit limit equivalent to roughly 10-20% max of the yearly gross revenue that the business made the year before.

So as a Startup Cannabis Company, one quick and easy solution to get funding can be solved by using Cannabis Credit Lines.

Banks can issue Non-Traditional Lines of Credit in the form of a credit cards that the business may use to make purchases and other transactions. Non-Traditional bank lending techniques have allowed for less restrictions in place to approve a business line of credit application. A Non-Traditional Line of Credit can become approved through meeting the following criteria:

  • Personal FICO Credit Scores ranging from Okay to Excellent.
  • Utilization Percentage and Available Credit Balances. Creditors care about how much you credit you utilize and what available credit space you have on your credit report.
  • Debt to Income Ratio. Creditors care about how much your monthly bills are in relation to how much income you make monthly.

In a Non-Traditional Business Line of Credit, each bank has its own standards for approving credit limits based on the borrower’s profile and what that creditor values in considering an amount in approving an application.

This table gives a short summary to the Underwriting Guidelines for Cannabis Credit Lines to finance your cannabis business:

Underwriting Requirements to Get Approved

Cannabis Credit Lines

Other lenders

Good Personal Credit Score (Minimum 700 and above)

YES

Yes

Funding Up to $250K *per borrower

YES

Yes

Introductory Interest of 0% for 12 Months

YES

No

Collateral (Secured)

Not required

Required

Personal and Business Tax Returns

Not required

Required

Bank Statements

Not required

Required

Balance Sheet

Not required

Required

Profit and Loss Statement

Not required

Required

Personal Financial Statement

Not required

Required

Subject to Annual Review

Not required

Required

If you need to finance your cannabis business, you may complete an application here.