Cannabis may be legal in California, but for many entrepreneurs, this industry still carries a stigma that can be hard to overcome when seeking funding. Investors may be intrigued, but the newness of California’s regulations paired with the unknown of funding a new business may create a level of risk that turns away funders. Plus, banks are reluctant to give new cannabis entrepreneurs a loan. Because cannabis is still considered a Schedule I drug by the DEA, banks that provide loans to California cannabis businesses could be subject to prosecution.
For a cannabis business, this presents a unique problem. Starting any business requires some amount of cash: according to Census data, more than 40% of all small businesses started up for under $5,000. Cannabis businesses are typically a bit more capital-intensive. For example, by some estimates, opening a cannabis dispensary can run you approximately $50,000-$65,000 in start-up expenses. Yikes.
Even if your business is projected to be less capital intensive than a dispensary, the more cash you have at the beginning, the greater your chances of success. Finding a funder is extremely helpful in launching your venture. So, how can you show your cannabis business is worthy of their consideration?
Decide whether you’re willing to do debt or equity.
Broadly speaking, there are two ways to get capital for a new business: debt and equity. When you select debt, you take out a loan that you have to repay over time (usually with some interest). When you select equity, you’re selling a piece of the company – essentially, trading a degree of ownership for cash. Both debt and equity options exist for cannabis businesses. What are the expectations for each?
Debt-based lenders have a fairly straightforward application process. They focus on tangible, straightforward numbers in determining your lending ability: credit score, character, capacity to repay, cash flow and collateral. For cannabis businesses, because there are so few traditional lending sources available, a loan might look a little different. More on that later on.
Equity investors ask for a formal pitch. As a potential business partner, they will want to know details such as your leadership team, product or service details, market size, competition and more. For cannabis companies, showing you’ve gone through proper California licensing and permit procedures and have immaculate records are going to be mission critical to working with an equity investor.
Though there aren’t many traditional funding sources open to a cannabis business, crowdfunding is still an option. The SEC allows anyone to invest $2,000 in small businesses in exchange for a stake in that business. Companies can raise up to $1 million through crowdfunding sources. Check out Fundanna, an equity crowdfunding platform for cannabis businesses. Other options include CannaFundr and 420fundme.
What’s the difference between equity crowdfunding like Fundanna and regular crowdfunding (like Kickstarter)? On Kickstarter, backers get a reward or prize for backing your business. Equity crowdfunding, as you may have guessed, gives backers a piece of the company. Your backers essentially become investors. If you’re not sure which option is right for you, feel free to reach out to the experts at Green Growth CPA. We can help answer all your questions and make sure you’re adhering to the site rules and policies.
Seek a loan from an angel investor, a private equity firm, or venture capitalist.
Though a traditional bank can’t offer your cannabis business a loan, there are other investors who will invest if you can give them a good chance of getting a return on their money. These types of funders will look for some key metrics before investing in your cannabis business. Generally, you must:
- Be a business in operation for at least six months.
- Incorporate as an LLC, limited company or S corporation.
- Have a personal credit score of at least 500.
- Not have a criminal record
- Be able to pass a background check
- Have gross monthly sales of at least $10,000 (alternately, if you’re a start-up, be able to demonstrate how your business will be able to have a certain level of monthly sales)
- Have a business plan.
- Have a business bank account*
*Banks won’t offer business checking accounts to cannabis businesses, so be prepared to show your cash flow management system or show that you personally have a bank account.
Look for venture capital funds that are familiar with the industry. Research Privateer Holdings, which has raised more than $100M to fund legal marijuana businesses. Others include Tuatara Capital, MedMen Capital, and Snoop Dogg’s Casa Verde – all large players in the cannabis industry.
Try an online business loan.
There are still some online business loan options for cannabis businesses. Many online loan companies have an easier time lending than traditional banks. Do some research to see if an online loan company can legally extend a loan to a cannabis company (as regulations will vary by state). The benefits of having a business loan include a streamlined application process, low-interest rates, and high approval rates. The downside? Some lenders do charge high-interest rates, and companies may not be allowed to offer loans to your cannabis company.
Take out a personal loan.
Many entrepreneurs take out a personal or business loan from another company to finance their startup businesses. When a cannabis company can’t get funding, some entrepreneurs take out loans through a different, non-cannabis business and then use those funds in a sub-loan to their cannabis business.
Depending on the loan lender, many companies don’t have any restrictions on what you use the money for. Check with your local lenders to be sure there are no regulations around using their loans for your cannabis business. To get a good personal loan, you’ll need a good credit score (700+). When you go for a personal loan, make sure to ask about their interest rates! Don’t get caught off guard should your business fail: this type of loan can have big repercussions on your personal life.
Questions? Get in touch, we’re happy to help!