How to Get a Cannabis Business Loan in 2022
You own a cannabis-related business. You need money. In this article, we’ll explain how to get a cannabis-related business loan in 2022.
First, a little background…
There are two forms of financing a business owner can obtain: equity and debt. Equity financing is when a business owner gives up a stake in their business for cash, for example a dispensary gives someone 25% ownership for $500,000. Debt financing, on the other hand, is what we traditionally understand as loans, for example a dispensary borrows $500,000 and has to repay $600,000.
Originally, most capital entering the cannabis industry was in the form of equity financing. The reasons for this vary, one of the main ones being that with cannabis being a relatively new industry, most companies had not yet achieved the cash flow needed to fund loan repayments.
Over the past few years, we have seen a dramatic increase in the number of debt financing providers (lenders). Some examples include Bespoke Financial (founded in 2018), Seed to Sale Funding (founded in 2019) and FundCanna (founded in 2021). According to MJBizDaily, in 2020, “debt accounted for 74.5% of total capital raised…the first year in cannabis history that debt exceeded equity.”
Despite the growing prevalence of debt financing in the industry, since cannabis remains federally illegal, it is still very difficult to obtain financing from a traditional financial institution such as a bank. A few credit unions are starting to dip their toes in the water, but for the most part the landscape is dominated by private lenders.
Now in 2022, a cannabis business owner now has a variety of financial products available, such as invoice factoring, vendor financing, term loans, commercial mortgages, and more. .
Cannabis, being a high-risk industry due to increased government surveillance, has higher interest rates. The good news, however, is that with the influx of new lenders, we are starting to see rates come down.
Go directly to a lender or use a broker
If you are a cannabis business and are looking for debt financing, you have two choices: (1) go directly to a lender or (2) use a broker.
Although going direct seems like the obvious choice, using a broker is usually your best bet, for a variety of reasons.
The reality of this industry is that despite the growing number of providers, each lender has a specific niche. Factors that vary from lender to lender include:
- Financial products offered
- States in which they lend
- Underwriting guidelines (i.e. down payment requirements, credit score, minimum length of business, monthly income, types of businesses they work with, etc.)
- Minimum and Maximum Funding Amounts
- Interest rate
- Terms of office
- Warranty Requirements
- Terms of office
- Required documents
Every lender has unwritten preferences. For example, some lenders give their best rates to dispensaries; others to farmers. It’s not just about whether you qualify for a lender’s program, but whether that lender is able to offer you the best possible terms.
A broker, who has already seen hundreds of cases, will know (1) which lenders will be able to provide you with what you need, (2) which programs you qualify for and (3) which is best suited to your situation. single situation. situation.
The other value that the broker offers is being able to provide feedback on the deals offered by lenders. Suppose you receive an offer from a lender – how do you know it’s a good offer? The reality is that unless you’ve seen many offers already, you have no way of contextualizing what you just received.
You could go lowball. There could be much better options out there. A broker is able to defend you, keep lenders honest and guarantee you capital at the best rates.
Finally, there is the convenience factor. Researching and contacting lenders takes time. Preparing the required documents, seeing if you qualify and comparing rates can be daunting. It is much easier and faster to leave the job to a cannabis finance expert.
Before applying for a cannabis business loan, you are going to want to prepare the relevant documents.
This will depend on the specific type of financing you are looking to obtain. For example, for revenue-based funding, such as a merchant cash advance, bank statements for the past three months or so should suffice. On the other hand, home loans may require more rigorous documentation upfront.
A broker will help you determine, depending on the financial product, what documents will be required. Some commonly requested documents include balance sheets, income statements, real estate schedules, recent credit reports, and personal tax returns (if you expect a personal guarantee to be required to obtain financing, such as for startups).
Some cannabis-specific considerations when looking for funding:
- I have a previous conviction for a cannabis crime. Can I get financing?
- My company does not have a license. Can I get financing?
- It is very difficult to obtain financing as an unlicensed cannabis business.
- My business operates primarily in cash. Do I need a bank account? Can it be a personal bank account or does it have to be a business bank account?
- This will depend on the type of financing you are looking for. For income-based financing products, lenders will want you to have some type of bank account, whether personal or business, to verify cash flow. Other financing solutions, such as invoice factoring, do not necessarily require a bank account.
If you are interested in obtaining funding for your cannabis business, please contact us at spincapitalgroup.com.
Thanks to our vast network of financial partners, we are able to obtain the best financing conditions for our clients.