Whether you’re looking for short-term or long-term financing options, we have the secrets to scoring a cannabis business loan. And while needs can change across verticals, there are some basic guidelines to follow when preparing for a credit or lending request.
Cannabis Business Lending Options
Although lending options are more limited for cannabis operators due to outdated banking regulations, there are still many options depending on your needs.
Financial Institutions
It is now possible to get a cannabis loan through a credit union or regional bank supporting cannabis businesses. In Canada, operators have access to traditional banks such as BMO Harris, which now issue business loans for cannabis operations. For information on participating financial institutions, check out our website for a list of partners.
For access to quick cash, we often recommend institutions such as BeSpoke Financial, which can provide short-term financing options to help build your business. While the monthly interest rate can be higher than traditional lending institutions, this is an excellent option for companies operating at a high capacity and needing quick cash access. Even with a higher interest rate, the liability usually only digs 5-10% into the margin in working with our clients.
Cannabis Public and Private Investors
Consider working with a private investor who can invest money into your business for a share of ownership or loan payback with interest. Public investment groups like Arcview Group specifically support cannabis organizations. At the same time, groups like these can have higher interest rates and shorter terms.
Capital brokers are another great option if you’re trying to expand your search for investors. Many capital brokers work with investment groups and individuals across the US and even globally. By broadening your search, you may be able to find a solution that works for your business.
Lines of Credit vs. Term Loans
Knowing the difference between revolving lines of credit and term loans is crucial when deciding what type of lending to secure. Organizations like BeSpoke Financial can be creative with their lending terms. They can even offer invoice financing options, where you get an advance to pay vendors with receivable invoices.
However, reading the fine print with all lending options is essential. By comparing interest rates, payment options, prepayment penalties, and terms, operators can make the best decision to support their business needs. To understand the differences in lending options, consider two main types: lines of credit and term loans.
Line of Credit
A revolving line of credit is the most flexible business lending product. You can use it, pay it back, and use it again. Some options offer interest-only payments, but rates are subject to change. While large rate fluctuations can affect the business’s ability to pay back the borrowed amount, they can also increase your payment.
Despite the risk, many operators who require short-term cash flow regularly will opt for a line of credit. This can be an excellent tool for the operators whose accounts receivable are low on cash between product sales and product payment. Business owners can quickly access capital by transferring money directly into their bank accounts and payback later.
Term Loan
In contrast to lines of credit, a term loan is a one-time installment where you receive a lump sum and pay back the lender a set amount plus interest over a specific period or term. Terms can vary, but most are a minimum of 12 months and go up from there. Shorter-term loans are easier to qualify for but are usually limited to smaller amounts of cash.
There is often a more lengthy application and approval process for increased access to capital and more extended repayment options. This can be an excellent option for the operator looking for a more budget-conscious longer-term need. Term loans are often used to finance equipment, purchase commercial property, or fund construction. They can have lower interest rates than lines of credit but offer less flexibility for the operator.
Getting Your Cannabis Loan Approved
So what are the secrets to scoring a cannabis business loan? Qualifying for cannabis business lending is similar to any type of lending process. You’ll want to develop a clear and concise business plan before meeting with your lender. In addition, you’ll want to ensure you have all your financial documentation in order. But here are some things you may not have considered your lender will assess when reviewing your request.
Personal Credit
While some operators don’t realize this, lenders will consider your entire financial health when analyzing a loan request. Business lenders often decline requests due to poor credit or too much debt on the personal side.
Lenders look at past credit experience and credit score as a precursor to risk. Low credit and high debt exposure show an increased risk of repayment for the lender. Essentially, if you can’t pay others back, how can you pay us?
Down Payment
Similarly, operators are often surprised to hear lenders reject their loan requests due to insufficient down payment. Asking for a loan means you’re asking someone to take a risk on your idea. If you’re not willing to lose your own capital, what makes others willing to lose their money?
Lenders also want to ensure you have skin in the game and are willing to risk your own funds as part of your commitment to your business plan. If you have collateral such as equipment, a car, a home, etc., with equity, lenders will often use the collateral to forgo some of the risks.
Poor Financial Preparations
Are you even prepared to ask for a loan? Do you have all your financial documentation in order, and can you provide additional documentation if requested by the lender?
If you don’t have an established relationship with a cannabis accountant or CPA, you’re probably missing some of the necessary documentation. Be sure you can provide accurate financial reporting by gathering all your tax returns and financial statements ahead of time. Don’t waste your chances of getting approved by showing up ill-prepared.
Why is scoring a cannabis business loan so difficult?
No one ever said scoring a cannabis business loan would be easy! While the industry is booming, it’s still new, and until banking regulations catch up to legalization, we will continue to see challenges regarding lending options.
For assistance getting started with your lending needs, reach out to our team of financial experts at GreenGrowth CPAs. We can review your current financial health and help you get prepared for future lending opportunities. We employ several financial programs that can assist the company with its fiscal responsibilities including, tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.
For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.
