March 11, 2024

Cannabis Financing: How to Navigate Sky-High Interest Rates and Limited Lenders for Cannabis Businesses

Cannabis entrepreneurs face major challenges when it comes to business financing. Even as recreational use becomes more common throughout the United States, funding options for cannabis businesses will face limited funding options until legalization — or at least rescheduling — occurs at the federal level.

Why are banking services limited for cannabis-related business?

Despite widespread state-level legalization, cannabis is still classified as a schedule 1 drug under federal law. Because they operate under a federal charter, national banks cannot service any type of cannabis business — not just cannabis dispensaries.

The SAFER Banking Act is the U.S. government’s attempt to address this issue, but the bill continues to stall. Without some form of legislative relief, many types of small business lending — for example, SBA loans — are not currently available for cannabis-related businesses.

There are options for cannabis companies, however. They can open accounts with credit unions or state banks and seek a line of credit from that institution. However, if they do qualify, cannabis business loans come with higher interest rates and lower borrowing amounts compared with other industries.

Available Types of Cannabis Financing

In the current financial market, there is (very) little-to-no cannabis capital. That said, here are the typical kinds of business loans a cannabis company might seek:

Commercial real estate loans: Real estate lending in the cannabis industry is private, and interest rates are sky-high. In most cases, owners — often of startups who need to secure land — personally guarantee these loans.

Term debt: Most industries can take out small business loans to finance investments. However, for cannabis, these loans are almost non-existent, and come with steep interest rates. Cultivation and manufacturing companies may turn to private lenders for equipment financing.

Line of credit: Although we recommend businesses keep a line of credit equal to their cash reserves (10-30% of annual revenue), to provide cash advances in the case of an unexpected event, cannabis businesses must go through an intensive application process and pay a high interest rate for a relatively low dollar amount.

How to Secure Cannabis Financing

The best way to find a financing solution for a cannabis business? Open a bank account with a local or state bank. As part of our work as Virtual CFOs for the cannabis industry, we facilitate introductions between our clients and FDIC financial institutions with whom we already have a working relationship.

Once you start the depository relationship, it can grow. Once you demonstrate credit worthiness to your lender — which can take time as the bank gets to know your business — it’s more likely they’ll offer you access to other services, including financing options.

Avoid Expensive Financing by Growing Your Business

The capital environment for the cannabis industry will be tight for the foreseeable future. To succeed in the face of high taxes and heavy competition, owners need to focus on profitability by developing a business plan to optimize overhead expenses and increase gross margin.

In other words, the biggest opportunity for cannabis businesses to grow cash is not from outside funding. It’s from operations.

Cannabis financing is limited and expensive. Improve your bottom line and fund your own business through profit.

It may seem like a tiny step, but the best way to avoid the need for financing is to start with the fundamentals: good cash flow management. Start by opening two bank accounts: one for working capital and one covering your estimated tax liabilities. It’s not enough to keep tabs of the amounts designated for taxes and the amount available for paying bills and payroll. Having two separate accounts ensures you stay disciplined around building cash reserves and saving for taxes, so that you don’t need to look for financing to cover expenses, respond to an emergency, seize an opportunity, or pay the IRS.

Are you a cannabis-related business owner? Attend my free webinar to learn more about cash management in these tight times. Learn more about our Virtual CFO services for cannabis companies.

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