Looking to cash in on the wave of new legislation that is legalizing cannabis for medical and recreational use across the country? You’re not alone. The legalization and decriminalization of cannabis in many states has opened up exciting new business opportunities, but entrepreneurs often struggle to obtain the capital they need to start or maintain their cannabis business. If you’re wondering if cannabis business loans might be right for you, ask yourself the following questions.
Are You Comfortable Working With a Non-traditional Lender?
Because cannabis is still considered a Schedule I controlled substance at the federal level, traditional financial institutions like banks and credit unions cannot be involved in financing surrounding the business, regardless of how legal it may be in your state. The federal government, which views any transaction connected to cannabis as an illegal activity, is responsible for monitoring traditional financial institutions. That means that these institutions cannot handle money connected to cannabis activity at all, including transactions like purchasing real estate, which is considered money laundering. While it may be possible to work with a local or state-chartered bank or community credit union, all banks are subject to a regulation called the Bank Secrecy Act that requires banks to flag transactions of 5,000 dollars or more that may be associated with illegal activity, including cannabis sales. The Bank Secrecy Act is one of the major obstacles facing cannabis business owners looking for financial options. Instead of working with traditional lenders, most cannabis business owners receive their financing from commercial lenders, angel investors, venture capital firms, or friends and family.
Do You Know What Type of Loan You Want?
Depending on where you are in your business (i.e. whether you’re just getting started or you’ve been up and running for a while), you will have two main options when it comes to cannabis business loans: debt funding and equity funding. Debt funding is the type of financing most people are familiar with, as it usually involves taking out a loan or using a business credit card. When utilizing debt funding, the borrower incurs debt and then pays the lender back over time, plus interest. In equity funding, the business owner offers shares of the company in exchange for financing, and the lender or investor gets their money back as either dividends or profit when the company is sold. Equity funding is more appropriate for cannabis business owners with an established business, as their companies have existing value. Cannabis business loans usually come in the form of private loans, real estate loans, equipment leasing loans, and dispensary cash advances, depending on what you need the money for.
Do You Have Your Paperwork in Order?
Whether you’re working with a traditional lender or a non-traditional lender, you’ll still have to prove that you are able to repay any money loaned to you. Lenders will request, at a minimum, your personal credit report (and the credit reports of your business partners), three to six months’ worth of bank statements, balance sheets, income statements, and your capital needs. You and your business partners should have credit scores of at least 700, have a history of making your payments on time, and have no bankruptcies on your record. Many lenders will also require a clean criminal history for all business partners and management personnel due to the risky nature of the cannabis industry. Some lenders may also want to review a list of your key management personnel and a list of all active cannabis licenses held. Before applying for any type of cannabis business loan, it is critical that you have all of your paperwork in order so that your loan process moves forward as quickly and smoothly as possible.