The cannabis industry is smoking hot right now, with every legalized state adding more and more merchants and customers to the economy. And yet, new businesses are struggling to find the loans and cash advances necessary to start up and grow. What gives?
To start, the legalization of marijuana varies state by state and is still considered an illegal Schedule I drug by the DEA and the federal government. The SBA will not issue loans due to the legal trouble a change in federal ruling would get them into. Banks also refuse to issue loans or even open a checking account for a cannabis business for the same liability reasons.
If the federal government chose to intervene with legalized state rulings, they could potentially shut down the marijuana shop at any time until marijuana is no longer classified as a federal Schedule I drug. That would mean any lender owed money by a shutdown grow house or dispensary would not be paid back.
Cannabis is a mostly cash based industry, with a few accepting cryptocurrency, which is a high risk factor for a few reasons: cash is harder to trace, and cannabis businesses without checking accounts means the businesses can’t provide bank statements or a credit score.
Having no credit score or credit card statements is a major red flag for lenders and funders alike, especially uncollateralized. If a marijuana company defaults on a payment, the lender would have nothing to go after or collect in attempt to get back their money.
Both the legal restrictions and cash business mentioned above make the industry high risk, but there’s more. Any bank that is FDIC-insured won’t want to work with a cannabis business because of the FDIC’s regulations on lending to high risk companies, as well as the possible negative public backlash, the violation of federal law and the subsequent possibility of federal raid, seizure and shutdown at any time. Additionally, banks providing loans to businesses associated with the drug could be subject to prosecution if the business breaks state law by selling to a minor or transports cannabis across state lines.
Some companies get around this legal gray area by only going to in state banks. Interstate lending has a headache of regulations, so, for example, eight banks recently opened up in Colorado to fund the thriving weed businesses.
Tips On Getting Funded
FundKite funds on a case by case basis. If you’re looking for funding for your cannabis business, you are welcome to apply. Our application is free and asks only a few questions, but it will be hard to get the proper paperwork and underwriting for a safe and legal deal given the above information.
Equity VS Loan
You may want to pursue equity over a loan. Equity may expand your options to family offices, cannabis specific funds, angel investors, celebrity investments, and business accelerators and incubators.
Other Cannabis Industry Specialties
Other business approaches to get funded in the industry besides a growhouse or dispensary include cannabis software companies, smoking accessories manufacturing, medical dispensaries, or as a doctor with proper licensing. These are still under strict regulation, but may provide some banking loopholes.
Have Your Ducks In Order
Private equity firms, venture capitalists and other investors will need to be sure they will get a return on their money. For these investors, you must:
- Have been in business for at least six months.
- Be established as an LLC, limited company or S corporation.
- Have a credit score of at least 500.
- Be able to pass a background check.
- Have gross monthly sales of at least $10,000 or a solid business plan.
- Have a business bank account.
Know What It’s For
Know what you want to use the money for and clearly state it in your business plan. Popular uses for funding include:
- Cannabis business license fees. These costs can easily climb to $78,000 a year, depending on what type of business you’re planning on starting. Grow houses can be particularly expensive with equipment and utilities.
- Growhouse costs.
- Dispensary costs.
- Hiring new staff.
- Paying for equipment.
- Rent, land or real estate costs.