If you’re a current or prospective cannabis business owner, you may already be aware of the uphill battle facing you when it comes to finding banking and financial services. Despite the legalization of cannabis for recreational and medical use in many states across the country, cannabis business owners occupy a legal grey area because the substance is still illegal on the federal level, making financing a challenge. When looking into cannabis business loans, you might be surprised to find that there are a range of options available from commercial lenders specializing in cannabis financing, and while your business may be nontraditional, the documentation you will need for your loan is not.
What Laws Impact Cannabis Financing Options?
Cannabis might be legal in your state, county, or municipality, but it remains a Schedule I controlled substance at the federal level. This inconsistent and conflicting legal status makes the use and sale of the substance challenging from a legal standpoint, but perhaps no area is more fraught than financing. The conflicting legislation is best understood and interpreted by a commercial cannabis lender who works exclusively with companies in the industry and can help sift through all of the regulations. The problem is that traditional financial institutions, like banks and credit unions, are regulated by the federal government, which prohibits transactions connected to cannabis because the substance is illegal at the federal level. These financial institutions are therefore prohibited from handling transactions associated with cannabis in any way, including offering financing. You won’t be able to store your business’s assets at the bank down the street, and they also can’t offer you a loan because banks are subject to the same regulations around money laundering that individuals are. All banks are required to flag transactions of 5,000 dollars or more that may be associated with illegal activity, including cannabis sales, as part of the Bank Secrecy Act. Here’s where non-traditional commercial cannabis lenders have an advantage. The first licensed commercial lender focusing on the cannabis industry was founded in 2018, and before that, most companies relied on hedge funds and angel investors to help finance their businesses, but today, there are more options.
What Types of Financing are Available to Cannabis Business Owners?
As with any other type of business financing, there are two main categories of financing available to cannabis business owners: debt funding and equity funding. Most people are familiar with debt funding, as we use it as individuals in our daily lives; debt funding includes taking on debt by taking out a loan or using a business credit card, then paying it back with interest. There are four main types of debt funding for cannabis businesses: equipment leasing loans, private loans, real estate loans, and dispensary cash advances. Equity funding is a type of financing in which the borrower offers shares of the company in exchange for funding. Instead of paying back the debt in installments, the investor receives their money back in the form of dividends or profit when the business is sold.
What Documents are Needed to Apply for a Cannabis Business Loan?
Because of the nature of cannabis businesses and the fact that the industry still operates in a legal grey area, commercial lenders recognize the inherent risk associated with cannabis business loans. This risk means that the lenders will want ample evidence that you can pay them back, so they will likely require as much documentation as your local bank. When applying for any type of financing with a cannabis business loan, you’ll need to submit recent financial records, including balance sheets, income statements, and bank statements, your credit report, business plan, and evidence of your capital needs, as well as a list of all key management personnel and all active cannabis licenses currently held. Ask your lender for specifics on what they require.