Cannabis Loans: What Are Your Options?

The cannabis industry offers tons of investment opportunities. However, the strict licensing requirements and limited bank loans remain a stumbling block to many investors. As a canna-business owner, you can't just walk into a bank and ask for a loan. Cannabis is still illegal at the federal level. And for this reason, most banking institutions won't touch you.

That said, there are a few banks and credit unions providing the much-needed financing. Let’s go through different types of cannabis loans, so you can evaluate your options and find financial help that fits your situation. 

What Are Cannabis Loans?

Cannabis loans are like your typical business loans. The only difference is that these loans are specifically intended for cannabis, hemp, and CBD-related businesses. So you're supposed to update your inventory, buy equipment, hire new employees, and tend to other business needs with the funds.

Like traditional loans, cannabis loans allow for flexible payments ranging anywhere from daily, weekly, and monthly options. The flexibility of the payments all comes down to the lender's requirements.

Why Are Cannabis Loans So Difficult to Acquire?

Currently, there are 18 states that legalized recreational marijuana, and another 33 states made medical marijuana legal. Coupled with the ready market of cannabis users all over the U.S., marijuana legalization has prompted numerous investors to join the “green rush.”

You'd think that the promising business opportunities alone would make fund sourcing an easy affair for canna-businesses. But most financial institutions are turning down aspiring cannabis entrepreneurs, leaving them with limited financing options.

And that's not all; many cannabis businesses struggle to get a meager bank account with a federally insured financial institution. That is because cannabis remains illegal at the federal level. This prohibits banks and other financial institutions from dealing with cannabis-related businesses, making it even harder to secure a loan.

It is still possible to get a cannabis loan, though. It takes a bit of knowledge and ingenuity. You'll need to navigate your options cautiously to avoid the possibility of litigation and increase your chances of getting the loan.

Can You Get a Cannabis Loan Through a Bank?

The federal government regulates most major banks and credit unions. This means that state-chartered financial institutions have to report to a primary federal regulator, which could either be the Federal Reserve, FIDC, or OCC. And since cannabis is still illegal at the federal level, all transactions related to cannabis businesses are viewed as illegal. 

These regulations are so restrictive that although you may plan to use the loan to market your business or buy real estate property, the federal government still considers it money laundering. Additionally, all financial institutions are subject to regulations around money laundering. So they won't go near cannabis-related businesses. 

The other possible option would be working with a community credit union or state-chartered bank. But they are all subject to the Bank Secrecy Act, which requires them to flag all transactions above $5,000 that may be associated with illegal activity.

However, we may be seeing some changes soon. The SAFE Banking Act seeks to allow financial institutions to participate in the marijuana industry. It was passed by the House of Representatives in 2019 but is yet to be passed by the senate. Although it faces considerable opposition, there is still hope for cannabis entrepreneurs. 

Can You Get a Cannabis Loan From a Commercial Lender?

You could get a cannabis loan from a commercial lender. But you have to know where to look. Considering the fact that the first cannabis-centered commercial lender was licensed just in 2018, the option is relatively new.

Best Financing Options Available to Cannabis Businesses

Cannabis business owners generally have two types of financing options: 

  • Debt funding
  • Equity funding

Debt funding typically involves financing your business by either securing a loan or using a credit card. You then have to pay the lender the original amount plus interest. On the other hand, equity funding involves offering a share of your business in exchange for capital. Investors typically get their money back in dividends or profits.

Unfortunately, equity funding only works for established businesses that hold value. This means that new cannabis entrepreneurs have to use debt funding to fund their businesses at the beginning. Cannabis business loans generally fall into four different categories:

  • Private loans
  • Equipment leasing loans
  • Real estate loans
  • Dispensary cash advances

Private Loans

Private loans are available from unconventional non-bank lenders and generally come with interest rates ranging from 8 percent to 25percent, spanning one to three years. If you qualify for a private loan, the funds are typically made available to you in 7-14 days.

Most lenders focus on cannabis growers and manufacturers rather than dispensaries. And most private loans come from venture capital firms, which make it particularly difficult for women and minority-owned cannabis businesses to get a loan. That said, certain exceptions can be made for dispensaries with proven revenue. 

Equipment Leasing Loans

Most growers who need farming equipment but don't necessarily want to purchase it outright prefer equipment leasing loans. This type of special financing comes with interest rates ranging from 8-20 percent and is funded over a period of between one and seven years. The funds are typically available within 5-14 days.

Real Estate Loans

If you want to buy real estate to house your business or cultivate cannabis, a real estate loan might be the best fit for your particular needs. Real estate loans come in the form of hard money loans, bridge loans, and short-term mortgages. They are available to both medical marijuana dispensaries and cannabis companies. 

Real estate loans' interest rates typically range between 8-20 percent and are funded within 30 to 60 days after application. The repayment period ranges anywhere between one and five years.

Dispensary Cash Advances

It can be quite difficult for dispensaries to secure funding. If all other avenues fail, a cash advance is the most viable option. Unlike other forms of capital, a cash advance is not exactly a loan. So, to get one, your dispensary must have a strong revenue stream. 

Factor rates typically range from 1.30 to 1.49, with terms varying from four to 12 months. The best thing about cash advances is funding is received relatively quickly. After approval, you get funding in one to two days. This makes cash advances especially suitable for cases where you need quick cash on a short-term basis. POSaBIT offers one of the most favorable cash advance terms out there. You also get an extended payment period of up to 12 months.

Invoice Financing

Many cannabis businesses face cash flow problems due to extended lead times on open invoices. This often leaves them hanging in the balance and unable to cater to certain business expenses such as salaries and inventory purchases.

Invoice financing provides a solution to this problem by offering partial payment on outstanding invoices. It is a popular option for cannabis distributors, cultivators, manufacturers, and ancillary companies due to its flexibility and cash flow solutions.

The best thing about invoice financing is you only have to pay interest on the cash you use. You can also borrow for up to 90 days, with fees ranging from 2.5 to 3.5 of the invoice amount. This is the procedure for invoice financing:

  • You are issued an invoice for goods or services due in a certain period. If you need cash before the period elapses, you seek invoice financing from a lender
  • The lender deposits a percentage of the invoice amount directly to your account
  • You can then use the funds to finance your business. Financing fees accumulate during this time until you pay back the invoice amount in full.

Inventory Financing

Inventory financing is a short-term loan that is typically backed by assets – particularly your inventory. Inventory financing can help you solve your cash flow problems and even purchase more inventory.

Moreover, since it often involves having your lender pay your suppliers directly, you can get discounted cash-on-delivery pricing. That ultimately saves you money. Inventory financing is an excellent financing option for dispensaries, manufacturers, distributors, cannabis brands, and ancillary companies.

Like invoice financing, you only have to pay interest on the funds you use and can borrow funds for up to 90 days. Fees vary from 2.5 to 3.5 of the invoice amount depending on the lender and are accessed every 30 days. The general steps in inventory financing are:

  • A vendor delivers products and issues an invoice due in 30 days. If you don't have the money ready, you can request inventory financing.
  • The lender then sends an advance of the total invoice amount to the vendor.
  • After selling the products, you pay back the total invoice amount plus interest.

How to Apply for Cannabis Loans

The paperwork required for your application all comes down to the type of financing you are interested in and what your business qualifies for. Here are the general steps for applying for a cannabis loan:

Step 1: Determine the Financing Option

Before you apply for a cannabis loan, first determine which financing option aligns with your business needs. While you're at it, consider what you want to use the money for. Whether you want to cover short-term or long-term costs, or you’ll use the fresh funding to buy or lease real estate. 

Step 2: Get Your Documents Ready

Most cannabis loans require the following documents:

  • A completed application
  • Personal financial statements for all stakeholders with higher than a 20 percent stake
  • Cannabis deck and debt schedule
  • Voided business check
  • Business bank statements going back at least six months
  • YTD, P&L, and balance sheet
  • Executive summary, intended use for funds, and type of loan requested
  • Purchase orders if applying for inventory financing
  • Inventory list if applying for inventory financing

Step 3: Fill Out the Application

Once you've decided which loan you want to apply for and have all relevant documentation ready, you need to visit your preferred lender. You then get an application form and fill it out.

Step 4: Have a Talk With Your Lender

Once you've submitted your application, your lender will get in touch with you to learn more about your cannabis business and explain your available options. They will also inform you of the rates, payment structure, loan terms, and conditions. 

Talking to your lender also eliminates any worry about any hidden charges during the loan's closing or repayment process.

Step 5: Get Approved

Once you are approved for financial funding, your lender will present you with an offer along with an approval letter. If you agree to the loan's terms and conditions, you'll receive your funding contract.

How Much Money Can You Borrow?

Like with any other business loan, the level of financing you can get through a cannabis business loan comes down to a few factors, including:

  • Credit score
  • Financial records
  • Type of company
  • Personal credit history
  • Desired term length
  • Previous bank statements
  • Annual sales

The legality of medical or recreational cannabis in your state can also affect the amount you can borrow. That said, you may have a harder time getting a loan if recreational cannabis is not legal in your state. On the other hand, having a good FICO score and financial history can improve your chance of getting a loan large enough to cover all your expenses. 

The Bottom Line

Not so long ago, getting a cannabis business loan was very hard, and cannabis remaining an illegal substance at the federal level didn't help either. But now, as investors and financial institutions see the potential for profit in the industry, they are opening up to the idea of financing cannabis business loans.

That said, you might have to devote a lot more time and effort to your application than you would with a traditional loan. But, if you have a good credit score and align yourself with the right lender, you'll get financing for your cannabis business in no time.