Cannabis Direct Lenders: Improve Revenue Cycle, Grow Profit 

A Conversation with FundCanna’s Adam Stettner

When it comes to establishing a line of credit or securing a loan, the majority of small businesses are underserved by banks. Retail, restaurants, dry cleaners, construction and general trade businesses – defined by the Federal Reserve as companies with revenues as high as tens of millions of dollars per year – get declined at a rate of 75-80% by the very same institutions where they make their deposits.

Within this panorama, cannabis businesses aren’t an outlier – they are just an extreme within a banking system that doesn’t do enough to unlock capital and provide liquidity for small businesses in general.

Every industry has specific pain points in terms of capital – and within cannabis, different verticals will have unique needs based on their cash flow cycle. The secret to fueling growth is to match a businesses’ specific cash pain points with its assets – and that’s what a company like FundCanna aims to do. 

“In traditional business, there’s a 10-25% bank approval rate,” says Adam Stettner, FundCanna’s founder and CEO. “Cannabis is zero – unless there’s real estate involved or you’re a monster of a company. Traditional banks are not lending to this industry, but even when they do – and there will come a point when they do – they’re going to do it in the single to very-low double-digit approval rate. It will never be that banks are saying yes to cannabis en masse. They will say yes to cannabis at some point, but it will be very selective – and that is not dissimilar from traditional SMB.”

A loan or a revolving line of credit is a must-have for a growing business, so that’s why Stettner founded FundCanna, to meet the specific needs of the cash-starved cannabis industry. 

How to Secure Funding from a Direct Lender

Since I advise clients as they work to secure funding, I wanted to hear Adam’s perspective on how cannabis companies can put their best foot forward when it comes to applying for a loan or line of credit with a direct lender.

Here’s what he recommends.

1. Ask yourself: “How do I plan to deploy the capital and what yield do I expect?”

This is the first hurdle to clear: if you expect the return to be greater than the cost, then yes, you should borrow. If you expect it to be lower, that’s a sign you are borrowing to survive – or borrowing because you think you’re supposed to. In that case, spend more time reflecting on whether now is the time to pursue capital. 

These topics should be a regular part of conversations with your financial advisors.

2. Get your financials in order: bank statements, profit and loss statement, balance sheets. If you’re regularly taking care of your books, this will be no problem. Now it’s time to explore potential funding sources.
3. Do due diligence: There are a lot of less-than-savory companies out there. Who are you going to be working with? What’s their history, their reputation? Do they know how to design product and how to service you? Will they be there for you over time?

“Build a reliable, repeatable relationship,” says Adam, “because it’s not one and done. All business is going to use money in a way that acts like revolving credit – whether you use it as such or not. You might draw a payback and then a month later, want to draw again. You want to develop a relationship with a source of funding that you can rely on.”

Another thing to look out for during due diligence: Make sure you have control over when you take the money: “You never want to take money until you are ready,” Adam says. “Any funding source that pressures you is probably not somebody you want to work with.

Unsure how much capital you need and in what timeframe? It all comes down to revenue cycle: how fast you convert product into cash. 

(Watch here to learn how to determine your revenue cycle.)

The timing of the revenue cycle varies widely across the cannabis industry and is also impacted by vertical integration.

So how do you make sure you borrow the right amount, if you haven’t quite dialed in the revenue cycle?

“Start small,” Adam says. “You don’t want a relationship with a guy that’s just looking to throw files over the fence and get a commission. You want to work with a direct source of capital who is looking for a relationship and can be there when you need them.”

“If you think you might need $250k, there’s no shame in seeking approval for $250k but drawing $50k. If it’s relationship-based funding, they’re not going to pressure to take it all. They’re going to say, ‘Take the $50k you need right now, and I’m here for you if you decide you need more,” Adam says. “Now you’re right-sizing. You’re never going to draw more than you need.”

It’s All About Cash Flow

When a bank reviews financial statements for a loan, they’ve got a long checklist of items to assess, starting with FICO scores. For a cannabis direct lender like FundCanna, top of the list is cash flow: “It’s inflow and outflow of money,” Adam says. “’I’m candidly a little less concerned with profit, for any small business, but in particular cannabis because of taxation and the way things work in this space.”

The primary document to focus on is the bank statement, so the lender can see deposits and withdrawals. 

“We have ratios that we use to determine the serviceability of a payment based on that inflow- outflow, as well as other obligations. That doesn’t tell the whole story, but it begins to tell a story. Someone can have the best Fico in the world, but if you don’t know their cash flow, you have no idea what they can service.”

“Conversely,” he adds, “someone may have a mediocre Fico, but they may have very strong cash flow. Whom would I rather provide capital to? I’ll take a 640 Fico with good cash flow over a 780 Fico with weak cash flow. The Fico may be an indicator of history or intent. But if you don’t have cash flow, it’s pretty meaningless. I realize that is atypical for a funding source to say.”

As he designs his product, his goal is to create something that works for both sides.

“We always try to leave control with the borrower – which is often not the case in lending. They can choose how much to draw, when to draw it, when to pay it back, with no prepayment penalty. All they’re really doing is paying for time used. Then they can start that cycle again.” 

With the upcoming reschedule, cannabis businesses can expect to have more money in their pockets – and to qualify for higher funding amounts when they do manage to secure credit. But even if they one day find themselves on the same footing as other small businesses, they should still expect to face an uphill climb if they plan to use traditional banks.

“I’m an entrepreneur myself,” Adam says. “The more empowered I am, the more effective I will be. That’s what liquidity does. It empowers the operators. The ability to make unencumbered decisions is empowering.”

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