As the cannabis decriminalization and legalization movement spreads across the United States, cannabis, hemp, and CBD businesses are springing up across the country in welcoming states. As any entrepreneur knows, starting a business requires funding, as does growing a business and maintaining it. What would-be cannabis business owners may not know is that finding a cannabis business loan isn’t quite as simple as stopping by the local credit union and asking to apply for a loan. There are a number of complicating factors that make it more challenging for cannabis business owners to find financing for their businesses, but it is possible to find financing with the right lender.
The number one constraint for cannabis business owners when it comes to obtaining financing is the legal issues surrounding cannabis. While cannabis has been legalized for recreational and medicinal use in many states and decriminalized in others, it is still considered a Schedule I controlled substance at the federal level. This complicates matters for cannabis business owners seeking financing because traditional financial institutions, including banks and credit unions, are regulated by the federal government, which views any transaction connected to cannabis as an illegal activity. That means that cannabis businesses can’t obtain loans from these institutions for any purpose, even if it seems to be minimally connected, because the federal government considers this to be money laundering. Also, 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, which includes cannabis sales.
All of the legal issues surrounding cannabis mean that traditional financial institutions like banks and credit unions are generally unable to provide financing for cannabis business owners, leaving entrepreneurs with limited options. While the funding gap was filled early on by hedge funds and private investors, today, it is possible to get a cannabis business loan through a commercial lender, angel investor, venture capital firm, or friends and family. The first licensed commercial lender focusing on the cannabis industry was founded in 2018, and these institutions often work exclusively with cannabis businesses. Cannabis business owners once had limited options when seeking financing, but they are expanding.
One area where cannabis business owners find some relief when it comes to funding is that commercial lenders servicing the cannabis industry are better equipped to offer industry-specific loans that are appropriate for cannabis businesses. Industry-specific loans fall into two main categories: debt funding and equity funding. Debt funding is the type of financing most people are familiar with, and it typically involves taking out a loan and then paying the money back at regular installments over time, with interest. Equity funding requires that the business owner offer shares of the company in exchange for financing, and the lender or investor gets their money back as either dividends or profit when the company is sold. Within these two main funding categories, cannabis business loans usually come in the form of private loans, real estate loans, equipment leasing loans, and dispensary cash advances, but there are also other options, like inventory financing and invoice financing.
It may surprise business owners to find out that the application process for a cannabis business loan is much the same as any other business loan. Lenders will request, at a minimum, your personal credit report (and the credit reports of your business partners), three to six months’ worth of bank statements, balance sheets, income statements, and your capital needs. Credit scores of at least 700 are preferred, and applicants should have a history of making payments on time. Lenders may also want to review a list of your key management personnel and a list of all active cannabis licenses held. Applying for and receiving a loan will be a smoother process if all of your documentation is in order from the beginning. Applying for a cannabis business loan isn’t as simple as opening up a business credit card, but there are options available for cannabis business owners with strong financial histories.