Cannabis is a booming industry right now, and some people are even considering it a modern-day gold rush. However, strict restrictions mean that a significant amount of initial investment is required in order to begin a cannabis company. This is where cannabis business loans come in. Here is what you need to know about what a cannabis business loan entails.
Cannabis Loans Can be Hard to Find
Because cannabis is still illegal at the federal level, many banks are not willing to take a chance on what may be a risky investment. If the federal government decides to enforce its current cannabis laws, any cannabis business in which the bank has invested may suddenly go bankrupt and be unable to repay their loan. Another huge factor is that many big banks and credit unions are regulated by the federal government.
The federal government may view transactions related to cannabis as an illegal activity. Even if the loan is not directly for a cannabis business, for instance, if you need the loan in order to purchase real estate or marketing, the federal government may consider this money laundering.
What Financing Options are Available to Cannabis Business Owners?
It may be difficult to find financing for your cannabis business, but it isn't impossible. Debt funding and equity funding are two types of financing options that may be available to cannabis business owners.
- Debt funding. Utilizing debt funding, you can finance your cannabis business by taking out loans or using a business credit card. You will pay back your lender the original loan plus interest.
- Equity funding. With equity funding, you offer shares of your company in exchange for capital that can be used to build and market your business. The investor will get their money back in the form of dividends of the business or profit when the business is sold.
Debt funding is available to any business owner with good credit, while equity funding generally requires that your business already have some working capital. For this reason, debt funding is the most common way that cannabis business owners finance their businesses.
Types of Debt Funding
There are several types of debt funding available, each of which may be more useful and practical for your business, depending on your particular situation.
- Private loans. Loans from non-bank lenders often have rates of somewhere between 8 and 25% and last between 1 to 3 years. Funds can be available quite quickly using this type of financing, even in as little as 7 to 14 days. Private lenders often prefer focusing on growers and manufacturers of cannabis products.
- Real estate loans. If you need land on which to grow your cannabis or somewhere to house your business, a real estate loan may be a good option, with interest rates of 8 to 20% and terms generally lasting one to five years. Funding may take a little bit longer than private loans, about a month or two from the time of application.
- Equipment Leasing. If you need to buy farm equipment or other specialized equipment for your cannabis business, special financing for equipment is the way to go. These interest rates are around 8 to 20% and are funded over 1 to 7 years. You can generally know whether you are going to get your equipment lease within 5 to 14 days.
- Cash advance. Cash advances allow you to have money when you need it, generally within 1 to 2 days. Your business will need to show strong revenue in order to get one of these advances and they can be very expensive, so they should only be used for expenses that have no other funding options.
Choose a Trustworthy Financial Company for Your Cannabis Loan
The financial company that you choose for your cannabis loan should offer you capital as quickly as possible so as not to put a strain on your capital or hinder growth. They should be trustworthy, professional companies. Finally, the company that you choose should be very comfortable and experienced in providing loans for the growth of cannabis.
