The Essential Guide to Cannabis Business FinancingEverything cannabusiness owners need to know about finding cannabis business loans that meet their company’s needs - plus our list of cannabis funding resources.
The rapidly-expanding industry that has sprung up around widespread cannabis legalization has sparked the desire of many to build their dream businesses in this exciting new market. However, this heavily-regulated industry is an expensive one to enter. For most, cannabis business loans are the essential bridge to making this goal a reality. However, legal restrictions all over the world make cannabis business loans harder to obtain than those in most other sectors. In this article, we’ll cover everything cannabis entrepreneurs need to know about securing business financing – from the different types of cannabis loans and lenders to how to select the right financing for your unique business.
Financing for Cannabis Businesses
Starting a business in any sector is an undoubtedly expensive undertaking. Still, the cannabis market has a notably high cost of entry (dispensary startup costs, for example, typically range from multiple hundreds of thousands to millions of dollars). The vast majority of cannabis entrepreneurs simply don’t have the cash on hand necessary to fund an entire startup and maintain overhead expenses until the business becomes profitable. This is where cannabis business financing comes in, making essential capital available at every stage of the business lifecycle.
When is Cannabis Financing Used?
Startups often rely heavily on loans to get off the ground, but they aren’t the only ones. Established businesses looking to expand, going through an emergency, or electing to maximize cash flow by leveraging overhead expenses can also benefit from cannabis industry financing. This funding can be used for nearly any imaginable business expense, including the purchase or lease of Real Estate, equipment, buildout, inventory, production, compliance testing, utilities, payroll and human resources, bureaucratic fees, transportation, marketing, software, consulting fees, security, and more.
Cannabis business lenders work with every type of cannabis, hemp, CBD, and specialized cannabinoid business, including cultivators, manufacturers, testing labs, and dispensaries, as well as non-plant-touching ancillary businesses such as security firms, software creators, human resource services, and marketers. However, some lenders specialize in a specific area (such as retail inventory or cultivation equipment).
Challenges of Cannabis Financing
Since cannabis is subject to varying levels of legality in each country and state permitting its use, securing cannabis business financing is significantly trickier in this industry compared to most others. Even ancillary cannabis companies are affected by these strict rules and restrictions.
US money laundering laws currently discourage FDIC-insured banks from assisting businesses that contribute in any way to the sale of cannabis, making it hard if not impossible to qualify for traditional business credit cards, and ruling out the option of SBA (Small Business Administration) loans. As if that restriction wasn’t enough, banks serving the cannabis industry also take on the risks of reputation damage, insecure collateral (cannabusinesses are technically subject to raid and seizure by federal agents), and even criminal implications should a cannabis banking client break a state law (such as selling to minors).
These factors prevent most banks operating at the multi-state level from even touching the cannabis industry. Some localized banking institutions do work with this industry but usually mitigate their risks by charging higher interest rates or requiring significant down payments or collateral. Even in countries where cannabis is completely legal, like Canada, the banking industry has been slow to catch up, with most traditional financial institutions still unwilling to service the cannabis sector.
However, things are slowly improving for cannabis banking in the US. The 2018 Farm Bill effectively legalized all hemp banking transactions, exempting industrial hemp and hemp-derived cannabinoids (including CBD and delta-8 THC) from the Controlled Substances Act. Meanwhile, the SAFE Banking Act, which would decriminalize and provide support for cannabis business banking and lending in legal states, has passed in the House of Representatives and will hopefully gain enough Senate votes to be enacted into law within the next few years.
In addition to its federally-illegal status in the US, the cannabis sector is also seen as a high-risk investment due to its heavy reliance on cash. Federal banking restrictions have caused many cannabis businesses to be primarily cash or cryptocurrency-based, leaving few traceable assets to go after in the event of a payment default. Without the ability to trace and verify via bank statements, assessing a cash-based company’s stability and debt repayment track record is significantly harder, translating to a higher-risk investment for lenders.
Types of Cannabis Financers
Fortunately, despite the restrictions, many cannabis business loan options are available if you know where to look. Here’s an overview of the most common cannabis business financing methods.
While FDIC-backed banks still tend to avoid cannabis and ancillary businesses, the 2018 Farm Bill opened up traditional bank services, including business loans and credit cards, to hemp businesses. However, a growing number of smaller local banks and credit unions are also willing to work with cannabis clients within their home states.
A growing number of private lenders are not only willing to lend to cannabusinesses but specifically have an interest in financing this new market. Of these private lenders, alternative or “hard money” lenders tend to be the most lenient when it comes to applicants with lower credit scores and often offer the most flexible selection of term options. To offset their risks, these lenders typically charge higher interest rates or may require greater collateral.
Venture Capital Firms
Venture capital firms specialize in lending to start-ups and early-stage companies. Typically, lending terms with these firms involve equity (a share of business ownership) and varying degrees of hands-on control of your business. Application requirements are stringent with most venture capital firms, requiring all clients to have a decent credit score, a detailed business plan, business insurance in place, and corporation or LLC paperwork already filed.
Similar to venture capital firms, angel investors also work with start-ups and early-stage companies and commonly require business equity in the loan terms. However, angel investors are usually a person or a small group, and may not always have as much money to lend as a venture capital firm.
Of course, if you have friends or family interested in helping you get your new venture off the ground, personal loans can be an excellent cannabis business funding resource. To eliminate any future conflict over business assets and equity ownership, it is always wise to have a legal professional draft and notarize the financing terms.
Crowdfunding has become an increasingly popular way for individuals to raise money for anything from a dream wedding to medical expenses, but one of its original applications was, in fact, for startups seeking capital. Several cannabis and hemp-specific crowdfunding sites have popped up to fill this niche in recent years since mainstream crowdfunding sites like GoFundMe generally prohibit cannabis-related funding.
Sometimes B2B companies selling grow equipment, dispensary furnishings, lab equipment, packing supplies, or other business resources offer interest-based financing terms on a revolving or term basis at the point of sale.
Social Equity Lending
Additional cannabis business funding is available in some cases to members of Black, Latino, LGBTQ+, and other communities who have been disproportionately harmed by the criminalization of cannabis in the US and are still largely under-represented in the growing legal market. While these social equity cannabis loans may not cover the entirety of start-up costs, they can help bridge the gap, putting market entry within reach for members of these communities. The availability of social equity loans varies by city and by state.
Types of Cannabis Business Financing
Term loans offer a one-time lump sum payout that must be repaid in full, plus interest, by a designated date. Both the length of the term and rates of interest will vary depending on the source (hard money, private lender, venture capital firm, etc.), and may require a sizable down payment as collateral. Term loans can be an excellent resource for startup costs, expansion, or emergencies.
Working Capital Line of Credit
These revolving lines of credit can be used as needed and paid off incrementally, much like a traditional home equity line of credit (HELOC). Interest on the total balance is accrued each billing cycle. These credit lines can be a great way to ensure you always have enough on hand to meet overhead or extras as they come up.
Inventory or Equipment Loans
Designed to assist businesses with acquiring inventory or equipment, the inventory or equipment itself is typically used as collateral for these loans, and interest rates tend to be comparatively lower. Inventory and cannabis equipment financing may either be issued as part of a revolving line of credit or as a short-term lump-sum loan.
Real Estate Loans
Unless you have significant cash on hand, purchasing property on which to operate your cannabis business will require a Real Estate loan. Fortunately, interest rates, down payments, and closing costs for cannabis-zoned Real Estate generally align with an area’s current market rates. While a down payment is usually required, the property stands as collateral until the loan is paid in full.
However, a few hurdles exist in obtaining cannabis Real Estate loans. Without access to a full suite of banking services, application steps such as providing proof of funds can be tricky. Larger mortgage lenders may be averse to working with you, and cannabis businesses are likewise disqualified from federally-secured business mortgages. If you are paying cash (which can sometimes be sourced via a private lender), these issues may be reduced or avoided. Otherwise, it is always wise to work with a Real Estate lender who is familiar with and has experience catering to cannabis industry clients.
Cannabis Loan Application Essentials
Doing things correctly from the start will save time, effort, and potential headaches down the road, so don’t overlook these important tips when applying for cannabis business loans.
- Have a plan – Know how much money you want to borrow and what exactly you plan to do with it. Lenders want to feel confident that you will use the money they hand over responsibly, be capable of successfully repaying the loan, and potentially build valuable business equity.
- Be upfront – Don’t try to fly under the radar by failing to disclose your connection to cannabis. The legal penalties when your ruse is discovered (not to mention the devastation of your business) aren’t worth the risk – especially as business records are publicly accessible and this information likely won’t stay hidden for long.
- Look out for scams and predatory lenders – Always read every line of a loan agreement in full before signing on the dotted line. Considering how technically complex the wording on loan agreements can be, it’s wise to have a lawyer review and clearly explain the terms to you. Wherever possible, avoid doing business with lenders who are overly pushy to close the deal right away or who try to discourage review by your attorney.
- Get multiple quotes – While the loan application process can be a bit tedious, getting multiple offers can be well worth the extra legwork. You could potentially miss out on significantly better loan terms if you rush to sign with the first lender you come across. To cut down on the time and effort shopping around takes, you can choose to work with a broker, who will take a one-time application from you, run your information through their network of lenders, and then present you with a list of options.
- Work with credible, established lenders – Always do due diligence on a firm or investor before entrusting the funding of your business to them. Ask around within your local industry network, and read through plenty of online reviews and recommendations from trusted sources – such as our list below of vetted and recommended cannabis and hemp lenders. You can click through to learn more about each one – and potentially start the application process today.
Our Recommended Cannabis Business Lenders
Finding a trustworthy cannabis business lender who can meet the financial needs of your business can be a challenging prospect. To help start your search on the right foot, we’ve put together a list of established cannabis business lenders that we like, trust, and recommend.
Best Cannabis Business Financing Resources
Clarify Capital is a top-rated business financing resource, with a network of over 75 private lenders to help you find the dispensary financing that best meets your needs – and budget. Clarify Capital offers collateral-free dispensary startup loans up to $750,000, with affordable interest rates, and flexible terms from 6 months to 2 years. Dispensaries have access to short-term loans, business lines of credit, equipment loans, and merchant cash advances. The application process is easy and streamlined, with instant approvals and funding within 1-2 days, and dedicated Clarify advisers are available to walk you through every step of the way. With a service-driven approach and genuine investment in your success, Clarify Capital is dedicated to making access to business funding accessible and keeping the process simple. Clarify Capital is headquartered in New York City.
With over 20 years of experience helping small businesses across hundreds of sectors access essential financial services, BitX Funding provides startup funding for cultivators, dispensaries, and all other types of cannabusinesses. Drawing on its omnichannel network of lending sources to find the loan that best fits each client’s unique business needs, BitX can assist with start-up loans, equipment financing, business lines of credit, merchant cash advances, and short- and long-term loans ranging from $5,000 to $500,000. Applying for a loan through BitX is a quick and simple 10-minute process, which can be done online or over the phone. Response times and funding are fast, often as quickly as within 24 hours. With a core dedication to supporting small businesses, BitX offers top-notch, personalized service to help new and established cannabis and hemp businesses access the funds to reach their full potential. BitX Funding is headquartered in Fairfield, Connecticut, and services clients in all 50 US states.
An innovative fintech firm at the forefront of the emerging legal cannabis market, Green Check provides this industry with deep insights, software solutions, and essential financial and business services. Connection is at the heart of Green Check’s mission – connecting cannabis businesses with the resources they need to grow while forging a transparent connection between financial institutions and the legal cannabis industry. In addition to a full suite of banking services, Green Check’s network of commercial lenders makes working capital, inventory financing, and Real Estate loans accessible to cannabusinesses of all types. Trusted by over 7,000 businesses and working directly with over 140 financial institutions, Green Check is an indispensable resource for the cannabis industry. Green Check is headquartered in Bonita Springs, Florida, and works with businesses throughout the US and Caribbean.
The oldest credit union in California’s Sonoma County, North Bay Credit Union is a Bauer 5-Star rated bank dedicated to offering its members affordable, personalized banking services, loans, and more. Through a partnership with Greenbax Marketplace, North Bay CU offers a full suite of METRC-compliant banking options for cannabis companies, including payroll services, merchant card processing, checking accounts, banking and loans for employees, and commercial loans, both Real Estate-backed and sourced through its extended network of lenders. As a truly affordable non-profit institution, North Bay CU’s cannabis business banking is subject to a flat monthly fee and does not tack on extra “nickel and dime” fees. North Bay CU serves Sonoma, Marin, Solano, and Napa counties out of its four branch locations in Santa Rosa, Sonoma, Healdsburg, and Rohnert Park. Cannabis banking services are available to clients throughout the US.
One of the few progressive US banks to fully embrace the cannabis sector, Needham Bank offers a full suite of banking services to the medical and recreational cannabis industry. The first bank in Massachusetts to step into the marijuana market, Needham Bank is willing to work with cannabis clients in any state where medical marijuana is legal. Needham Bank’s cannabis business loan options include construction, Real Estate, working capital lines of credit, term loans, and more – as well as business checking accounts and remote cash management services. Needham Bank prioritizes excellent customer service, with a dedicated team of 30+ cannabis banking specialists to help you meet your cannabusiness goals.
A direct hard money lender serving California’s cannabis industry, Mortgage Vintage, Inc. specializes in originating and funding cannabis business purpose loans for Real Estate investors as well as business owners. Founder Sandy MacDougall draws on over 30 years of financial industry experience and a dedication to superb and always professional customer service, providing borrowers with a transparent, flexible, fast, and easy loan submission process. Turnaround is quick, with same-day term sheets and funding in 3-7 days. Mortgage Vintage, Inc. is willing and able to work with applicants who are self-employed, foreign nationals, have lower FICO scores, or have other special circumstances. All loans are based on committed terms and may be used to secure commercial or agricultural cannabis property in California. Mortgage Vintage offers services in English and Spanish, and is headquartered in Newport Beach, California.
Best Hemp & CBD Business Financing Resources
Magnifi Financial offers a full suite of banking services to Minnesota-based CBD and hemp companies, including access to customized term loans and revolving lines of credit. As the state’s largest commercial-lending credit union, Magnifi can offer the lowest interest rates and fees in the local industry. And with extensive expertise in the state’s hemp and CBD market, Magnifi is qualified to help you stay in compliance and will even visit your business to ensure annual on-site requirements are met. Members have access to in-person banking and loan services at Magnifi’s 26 branch locations, spread throughout central Minnesota, from Fargo down to Minneapolis – as well as remotely, via a dedicated business phone line and online services.