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Funding Options in the Cannabis Industry: Debt & Equity

While finding funding and access to capital or money is a challenge for all businesses, it’s especially hard in the cannabis industry. But that doesn’t mean it’s impossible.

In the state legal cannabis industry, there are no large institutional sources of capital capable of legally offering funding solutions. However, there are semi-institutional, semi-private, and private sources of capital that provide funding to plant-touching and non-plant-touching cannabis companies.

National Lending Problems Hurting Cannabis

Lending from traditional institutional capital sources is down overall since

interest rates are high to curb inflation. The trickle-down effect impacts the availability of capital in the cannabis industry in New Jersey and elsewhere. However, cannabis entities can access several loan products if they meet the requirements.

Figure out which loan is best for your business. Consulting with a lending specialist is often valuable to maximize lending capacity which reduces the short- and long-term cost of capital.

Acquiring debt is reported to credit agencies. Every business has a limited borrowing capacity.

Finding a Good Lender

No federal or institutional-level lenders provide capital to the cannabis industry currently.

The best lenders will be small or regional banks, credit unions, semi-institutional lenders that specialize in the cannabis space, and private lenders.

Not all lenders are alike.

Borrowing capital tends to be complicated. Utilize the services of a funding professional. They can structure the loan and provide an access point to multiple lenders active in real estate purchases for cannabis businesses.

Lender competition for your business often speeds up the borrowing process and produces the lowest and most competitive interest rates.

As a business is successful, over time, rates can be lowered.

Check with your accountant first.

Business Term Loans

Term Loans are an excellent source of capital for cannabis businesses in post-revenue mode, especially and even critically near-startup dispensaries.

Lenders will utilize bank statements to determine loan amounts. Similar to Lines of Credit, Term Loans often require minimum monthly deposits of $20,000.

Being post-revenue for at least 4 months is the starting point.

For dispensaries, cash and debit card deposits can be used. For cultivators, manufacturers, processors, labs, and ancillary companies, all sales revenue deposited in the bank forms the loan calculation basis.

Lenders will often commit funds based on a formula of 10% to as much as 20% of monthly deposits. Payments on Term Loans cover the principal or the amount borrowed and the interest in equal amounts. The payments often begin nearly the day the loan is closed.

Loan amounts are generally offered between $50,000 and $10 million. Short-term loans are commonly available for 6 to 24 months. Long term loans can go for up to 10 years. Current interest rates for Term Loans are running 16% to 30% annually.

Generally, there are no restrictions on the use of capital. However, underwriters want an explanation of what the funds will be utilized for. Term Loans are not complicated and can close in a week or two.

Lines of Credit

A Line of Credit (LOC) is a flexible loan product that establishes a base borrowing amount. It allows the borrower to access up to 100% of the funds when they are needed.

Lenders look for monthly deposits of $20,000 minimum with a steady and preferably upward trend. The total loan amount loaned will be 10% to 20% of deposits, as noted on bank statements. 

One-time draw-down fees may be part of LOC terms. Interest is only charged on outstanding balances. Many businesses will open a LOC and use it either for specific short-term purposes or to tap funds during an emergency.

LOCs generally run between $25,000 and $10 million. They typically last for 1 to 3 years. If a good repayment history occurs, the LOC amount can increase while interest rates decrease. So, along with a short-term structured loan, LOCs are an excellent pathway toward larger and less costly business debt.

LOCs are popular for incubating dispensaries and cultivators.

Commercial Real Estate

Purchasing real estate is becoming common in the cannabis industry. There are many benefits to purchasing versus renting, like eliminating greedy landlords. So, securing a property with structured loan payments is logical.

Additionally, incremental increases in property value can provide a source of working capital at virtually the lowest interest rate available. Loan amounts generally start at $50,000 and go up to $100 million plus.

Loans are available for dispensaries, cultivators, processors, labs, distribution facilities, and any other cannabis entity. The Loan to Value (LTV) can be up to 80%, meaning the borrower puts down 20% collateral.

Putting down collateral means you need to agree to give them something worth the equivalent of the loan if the business falls apart. Some entrepreneurs put their houses up to get money for their business, which is risky. But if you don’t have something that can be used as collateral, then you can’t get the loan.

The most common LTV range is between 60% and 70%.

Commercial loan repayment terms, or amortization, typically run for 15 years. However, 20-, 25- and 30-year amortization tables are also available. 

Construction Loans

A construction loan is often the most logical loan product to obtain when you need to build something, even if you haven’t signed a deal on the land yet. Construction loans depend on:

  1. The current value of the property,
  2. The total cost of construction,
  3. The value of the property post-construction.

The first construction loan can cover the current property value plus the cost of construction. Commonly, it’s offered with an interest-only payment schedule. So, carrying costs do not impede project completion.

Once construction is completed, a second, long-term loan can be obtained which replaces the original construction loan.

Contractor estimates and real estate appraisals will guide the lender.

Utilize a funding consultant who can guide the project and the borrowers, lenders, and other professionals involved.

Working Capital Loans

When business operations need money, several turn to a Working Capital loan. They are often available on a customized basis, depending on the use of capital.

Both short- and long-term amortization tables are available. Loan amounts generally run from $10,000 to $1 million plus. If all the project and borrowing documents are ready, Working Capital loans are fast to close, similar to a Line of Credit.

Invoice Financing (Factoring)

An increasingly common way to borrow money in the cannabis industry is factoring. Unpaid Accounts Receivable invoices can be an asset to borrow against. As long as the payable is due from a creditworthy entity, it is common to be able to borrow 50% or more of the invoice.

There are no specific limitations on how many invoices can be factored. Factoring loans are available to all cannabis license holders and non-plant-touching entities.

Equipment Financing

Financing is available for the acquisition of used or new equipment. In some cases, 100% of the expense can be funded.

These loans tend to be quick to close with minimal documentation required. Information about what is being purchased, how it will be used, and the benefits of the business are normally required.

SBA Loans

Some businesses can qualify for loans from the Small Business Administration (SBA), an arm of the federal government.

SBA loans are government-backed which produces very low interest rates. Collateral is required. Many borrowers use real estate to secure the loan.

For further information and to discuss unique situations and funding requirements, please contact us at loans.cannabiz@gmail.com.

By David Goldenberg of Cannabiz Management

(Full disclosure: this is an advertorial published as part of a deal between Cannabiz Management and Heady NJ LLC.)

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