Cannabis Business Loans: What Questions Should You Ask Before Applying?

With the legalization of cannabis for medical and recreational use spreading rapidly across the United States, many would-be entrepreneurs and new business owners are looking for financing in this niche industry. Financing a cannabis business has some unique obstacles as compared to financing a restaurant or a clothing store, however. If you’ve been thinking about applying for a cannabis business loan, you may have a lot of questions that you want answered before applying. Make sure to ask the following questions of any lender that you consider working with.

What Regulations Might Impact My Ability to Obtain Financing?

Understanding the endless and conflicting legislation surrounding cannabis use and sale can be confusing thanks to the status of cannabis as a Schedule I controlled substance at the federal level, but your lender should be able to shed some light on the situation. The differences in legal status mean that even if cannabis use and sale is legal in your state, it is illegal on the federal level, which seriously limits your financing options. Traditional financial institutions are regulated by the federal government, which views transactions connected to cannabis as an illegal activity. That means that handling transactions associated with cannabis is illegal for banks, credit unions, credit card companies, and more. Not only are you unable to store your business’s assets at your local bank, but they also cannot offer you a loan associated with cannabis in any way because banks are subject to the same regulations around money laundering that individuals are. 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. This is where non-traditional lenders, like commercial lenders, come in. The first licensed commercial lender focusing on the cannabis industry was founded in 2018, so this option is relatively new. Prior to 2018, most companies relied on hedge funds and angel investors to help finance their businesses, but today, there are more options. Your chosen commercial lender will be able to shed light on additional local and state regulations that may apply to your business and impact your ability to obtain financing.

What Types of Financing Do You Provide to Cannabis Business Owners?

Most cannabis business lenders offer two main categories of financing to cannabis business owners: debt funding and equity funding. Debt funding usually involves financing your business by taking out a loan or using a business credit card, thereby acquiring debt that is then paid back with interest. Debt funding primarily falls into four categories for cannabis businesses: private loans, real estate loans, equipment leasing loans, and dispensary cash advances. Equity funding involves offering shares of the company in exchange for capital. Rather than being paid back at regular installments like a loan, the investor receives their money back in the form of dividends or profit when the business is sold. Equity funding is only available to companies that already exist and hold value, so companies that are just getting started will generally use debt funding to get off the ground. You’ll want to ask your lender which types of loans they offer within these two categories, as some may work exclusively in one category or the other. Some lenders may also offer inventory financing and invoice financing.

How Do I Know Which Cannabis Business Loan is Right For Me?

When speaking to your lender, ask for advice about what type of cannabis business loan might be right for your business. Depending on what you will be using the money for, you may have different options. For example, if you need to purchase equipment, an equipment loan or equipment lease might be a better option than a private loan, because equipment loans are secured by collateral (the equipment) and usually have lower rates. Your lender will be able to guide you.

What Information Do I Need to Provide When I Apply?

Every lender is different, but they will all want to receive a guarantee that you have the ability to pay them back. You’ll most likely be required to provide information like balance sheets, income statements, bank statements, your credit report, your business plan, and evidence of your capital needs. Make sure to be prepared to provide information on your key management personnel and a list of all active cannabis licenses held. Ask your lender for specifics on what they require.