Cannabis Business Loans
How to Get a Business Loan in the Cannabis Industry
Businesses in the cannabis industry know how hard it is to bank and obtain financing. Many traditional banks won’t work with you – either to open an account or to extend credit. Even though cannabis is increasingly legal at the state level, until the federal government changes its laws banks could lose their FDIC insurance and more if they worked with the industry.
Alternative lenders have stepped in to help small business owners in the cannabis industry with their funding needs. Because they obtain their capital from sources other than FDIC-insured deposits, they’re free to lend to the cannabis industry.
If it’s time to borrow, it takes just a few minutes to apply online. But if you’re not sure how much funding you need, or the type of loan best suited to your business, read on for some questions to ask yourself.
Top Considerations Before Applying for Financing in the Cannabis Industry
Preparation and knowledge are key to borrowing successfully. Before applying with a lender you should know how the loan will impact your business – both how it will help you succeed and its impact on your budget and cash flows. Here are a few questions to ask yourself if you’re in the cannabis industry.
Are you already an owner or are you looking to open or acquire a new business?
If you’re already in business, it’s easier to borrow. You’ll have data from last year’s income and expenses. You can predict cash flows and will know, for example, if you need to borrow to install new grow lights or a security system. Past cash flow and customer behavior can also help you forecast how an expansion could impact your sales revenues.
Existing business owners, whether you’re a medical dispensary or a grow operation, have a financial history to include in a loan application. You could pledge assets as collateral, such as allowing the lender to file a lien against your greenhouse. Assuming you’re profitable, borrowing as an existing business owner is easier.
Even an unprofitable business can borrow if it has enough cash receipts and a business plan that clearly shows its path to profitability. Your best option is to find an alternative lender who understands your business.
Small business owners looking to start a new business will have different funding needs. You would have to locate a building, obtain the necessary permits, and acquire products. Some landlords don’t want a medical dispensary in their building, and you could face opposition from nearby residents.
It’s likely that you’ll need a significant sum to get started – you’ll pay an estimated $250,000 to $750,000 to open a new medical dispensary. Because of your funding needs, you should likely apply for a large business loan. A lender could ask you to pledge personal assets – such as investment or retirement accounts – to secure the loan.
The stage you’re at in the business cycle will often help you decide how much to borrow and which lenders to approach.
Why do you need the funds?
Opening a new medical dispensary? You’ll have to locate an appropriate building to lease and cover monthly rent and the costs to renovate it. There will be upfront costs like installing a security system, shelves, and displays, and once you open there will be monthly utility bills and other fixed expenses before the dispensary turns a profit.
Small business owners expanding or investing in an existing cannabis business could face many of the same costs. Knowing why you need to borrow – i.e., how you plan on using the funds – helps determine how much you should borrow.
Here are some of the most popular reasons those in the cannabis industry take out small business loans:
- Invest in new strains, a grow house, or grow lights
- Expand in or open a new medical dispensary
- Purchase inventory
- Cover operating expenses like payroll or rent
Knowing why you need the money sets your borrowing limit and dictates how much capital you need to fund the business plan.
What can you afford to borrow?
Can your business’s cash flows cover your monthly loan payment? It’s an important question. Add up your fixed expenses – like rent and utilities – and calculate the amount of free cash flow you have left each month. If it’s not enough to make your loan payment, you shouldn’t borrow (or you should borrow less).
A loan payment is calculated by taking the amount borrowed and plugging it into a calculator with the repayment term and interest rate. Therefore, borrowing less reduces your monthly payments. Ask your lender what you’d owe each month before signing on the dotted line.
Your cash flows must cover the loan payments – particularly if there is a delay between when you have to pay for any new equipment and when that new equipment generates sales. When making a budget include a plan to pay back the loan. And try to plan for the unexpected, such as difficulties installing new equipment or a power failure that kills your new seedlings.
Will the project generate a profit?
How much revenue will your new grow operation generate in the first year of operations? In the third year? Before you borrow to fund a specific project, you’ll want to have a reasonable expectation that it will turn a profit.
When you borrow to fund a small business project it should have an expected return that’s greater than the loan’s cost. It’s best if the project generates more revenue for your business in the long run, not just breaks even. Evaluating a potential project in the cannabis industry can get quite complicated given the variables of changing local and state regulations and laws.
Before taking out a loan, determine if the project’s revenues will both pay back the loan and generate a profit using a few different scenarios.
Establish the funding timeframe
The lender selects a loan repayment term of a few months to several years. Since the repayment is spread out over a more concentrated timeframe, a shorter repayment term equates to a higher loan payment. Even though it would lower your monthly payment, think twice before choosing a longer repayment term.
It’s frustrating to still be making payments on a loan when you’re no longer receiving the benefits of what it funded. For example, let’s say you’re taking out a $15,000 loan to cover the cost of a grow lights. The grow lights will be fully depreciated after three years. If you took out a five-year loan to finance it you would still be paying on the loan after the lights had stopped working.
For capital investments, apply a matching principle. The loan’s term should end close to when the project is complete.
Maybe you need access to funds for working capital needs – to make payroll or pay rent during a slow month. For this type of borrowing need, a line of credit works best. It’s similar to a credit card, but a line of credit often has lower rates. It stays open (sometimes for a small fee) and you can draw on the funds as needed.
What is your business and credit history?
Small business owners with poor credit will find it harder to borrow. Lenders look at your personal credit score and the business’s credit history impact when deciding whether or not to lend to you. It also impacts the loan’s terms and interest rates.
Before approaching lenders, pull a free copy of your credit report and check your credit score. If you see any inaccurate information, work with the credit bureau to have it removed. Knowing your score gives you an idea of the rate you’ll pay to borrow – since a lower credit score reflects higher risk to the lender, you’ll pay more to borrow.
Best Business Loans for the Cannabis Industry
There are multiple loan products available to small business owners in the cannabis industry. One of these options will be the best choice for your long-term success.
Working Capital Loans
Working capital loans help you cover the expenses of day-to-day operations. You might need one if you have a cash flow gap – i.e., you had to pay a large supplier but are waiting to receive customers payments. These loans help with operational expenses, and can often be funded in just a few days.
With working capital loans, underwriters look at bank deposits and monthly revenues when making a funding decision. Since the cannabis industry is largely all-cash, they could dig a little deeper in your finances.
As long as you have a credit score above 650 and have been in business for two months, you can qualify for a working capital loan.
Bad Credit Business Loans
A bad credit business loan lets you borrow between $10,000 to $1 million, perfect for business owners struggling with credit and approvals. Because a bad credit business loan is meant for high risk situations, you can typically pay a premium.
To qualify you must have minimum monthly revenues of $10,000, a credit score above 500, and you have to be in operation for two months. Within as little as 24 hours after you apply, you could have the funds needed to launch your project.
Small Business Loans for Consolidation
The costs to enter the cannabis industry are high, and you may still be carrying debt from the lean times. Consolidating your debt could lower your monthly payments and save you money on interest.
Business loans for consolidation help small business owners roll multiple forms of debt – small business loans, lines of credits, or credit cards – into one loan product. It makes budgeting easier, since you only have one loan payment to remember. Often the interest rate on your combined loan product is lower than what you had been paying.
Alternative lenders best serve the needs of small business owners in the cannabis industry. You can apply online now in just a few minutes!