If you are planning to open or expand a cannabis-related business, you may need outside funding to accomplish your goals. Some experts estimate that on average, business owners need $150,000 to $2 million to start their business because of the high licensing fees and large capital requirements. Unfortunately, most traditional banks do not offer financing or banking services to cannabis companies. As a result, it is difficult to get money for advertising companies or cannabis businesses. Read on to learn more about the types of cannabis business loans you may qualify for and how to get financing as a cannabis business.
The challenge of raising money for cannabis businesses
The federal government has yet to legalize medical and recreational cannabis, making many traditional lenders reluctant to use cannabis-related businesses and businesses. Current federal law can classify cannabis industry transactions as money laundering and even blacklist the master account of a Federal Reserve bank if it has dealings with a cannabis industry. These policies make it difficult for cannabis businesses to get bank accounts at traditional banks and credit unions, let alone get small business loans. As a result, many cannabis business owners are turning to other loans and financing options to get enough money to start or expand their business.
Money type
Cannabis business owners typically apply for one of two types of financing: debt financing or equity financing. Debt financing involves taking out a loan for which you have to pay interest and then repay the lender.
Using a credit card to buy equipment or for working capital is also classified as a down payment because you will need to repay the line of credit. Equity financing is the process of exchanging stock in your company for capital. This type of financing for cannabis businesses is difficult for new businesses to receive because they cannot prove their profits, which means they will have to work hard to prove that they are worthy of the company’s investment. New cannabis businesses often choose to apply for loans, which we will explain in the next section.
Types of Cannabis Business Loans
Cannabis business owners often use business loans to get the capital they need to start their business. Since cannabis buyers can’t get loans from traditional banks, they often turn to third-party lenders and financing options to get capital.
Aside from personal finance, which many new cannabis distributors use, here are some options you can consider as a business owner in the cannabis industry:
Loans from friends and family
If you have family members or friends who can take out a few thousand dollars to help you start your business, you can go to them before contacting the loan company. Conventional loans like these can make you pay less interest, but even though they have more flexible terms, you should still make an effort to pay them back on time.
Commercial Leasing Options
Although you may not qualify for a small loan from any bank, you can get one from a credit bureau or bank that advertises its willingness to small business enterprises. About 700 of the more than 12,000 banks in the United States offer their services to marijuana customers, and you will have a better chance of getting a business loan from these companies that are interested in cannabis.
If you have time and patience, you can approach many of these banks and see what financing options they offer for your business.
Personal Loans
If you can’t get a business or personal loan, you can also go to a private lender, such as a capital company, to apply for a loan. Private lenders usually offer short-term loans ranging from one to three years and charge interest rates between 8 and 25 percent. You can get your money from a personal lender within a week or two of your approval.
Resource funds
You can also apply for funding to finance equipment costs for your new or growing business. You can use it to rent property at a low interest rate or get financing to buy it outright.
Issuance of invoices
Cannabis businesses also experience financial inefficiencies due to the long wait time between opening an invoice and receiving payment. Invoice finance is a form of finance that allows you to receive reimbursement for open invoices, resulting in a smooth cash flow.
Rent a commercial property
Some cannabis businesses are fortunate and qualify for real estate loans and financial institutions. These small business loans can provide the capital you need to purchase property for your distribution center or manufacturing facility.
Financial success for customers
If other cannabis financing options fail, you may want to apply for upfront financing to support your marijuana business. A cash advance gives you a lot of money quickly, but it usually lasts for a short period of time, between four and twelve months. You must prove a large amount of money to get this bonus. So, you may be looking for another option if you are a new business owner.
How much can a cannabis business borrow?
As with any business loan, the amount you can get from a cannabis business loan depends on many factors, including but not limited to:
- Credit score
- Personal credit report
- Cash register
- Company type
- Required service hours
- Annual sales (for established companies)
- Business plan
- Previous bank statements
The amount you can borrow may also depend on whether medical marijuana or recreational marijuana is legal in your state. If you live in a state that does not legalize recreational cannabis, it may be difficult for you to get money.