Cannabis is a bold new industry with expanding roots every day. It’s no surprise so many people chase the dream of creating their own cannabusiness. But, as entrepreneurs get their footing, the challenge of finding financing has a tendency to knock them off their feet.
Cannabis startups face unique financial challenges. Although many states in the US have legalized medical and recreational cannabis, any cannabis-related business is still not legal federally, making it hard to find bank loans or get set up with merchant accounts.
But it’s not an industry entirely devoid of fundraising opportunities – you just have to know where to look. Angel investors can provide fledgling cannabusinesses with the injection of cash they need to get their business off the ground while offering additional mentorship, experience, and networking opportunities to help their startup rise to new highs.
What is Cannabis Funding?
Cannabis funding primarily comes in three ways: reinvesting profits, taking debt out for a loan, or selling an ownership stake in the company.
A business that is already turning a profit may be able to reinvest these funds into the business to sustain itself. A company that’s not quite there yet could look into debt via loans or credit cards but must plan to repay the amount in the future.
The third option, which tends to be the most attractive option to cannabis entrepreneurs, is equity funding, which comes in exchange for a stake of ownership in the company and does not need to be repaid. Equity investments often come from angel investors, which can be easier to find for cannabis businesses than bank loans.
However, in 2018, Congress passed the Farm Bill, which removed Hemp as a Schedule I controlled substance. Without a controlled substance label, the federal government no longer regulates hemp-based products and CBD products. With less red tape, a few financial institutions are beginning to provide loans to cannabis startups, but the progress is slow.
What Can Cannabis Funding Be Used For?
Cannabis funding can be used for any kind of cannabusiness – whether you’re a producer, a dispensary, a lab, a land developer, or anything in between.
The money is used to support a variety of startup operations and essentials such as staff, facility construction, purchasing equipment, establishing marketing strategies, and more. The kind of business model you have will determine what unique costs you will need to cover using cannabis funding.
How a Cannabis Business Loan Can Help
Some of the most common needs cannabis startups use loans to help cover include:
- Application and License – Applications, licenses, registrations, and renewal fees cost thousands for cannabusinesses. Cover the cost with funding.
- Real Estate/Land – Find new locations for dispensaries or grow operations using cannabis capital.
- Building/Utilities – Construct buildings and maintain them over time with funds from a lender or investor.
- Equipment – Purchase new machinery, displays, and fixtures to support operations.
- Staffing – Hire staff as you expand, train them, and manage staffing costs with cannabis financing.
- Security – Secure your locations since you may be working with a controlled substance.
- Marketing – Establish and grow a customer base, promote your products, and optimize your marketing strategy with funds.
- Inventory – Maintain adequate inventory levels with cannabis funding.
A loan or investment can take the pressure off of starting a cannabis business and ensure you have the necessary funds to get your idea off the ground.
Can a Cannabis Business Borrow Through a Bank?
Banks are unlikely to approve borrowing for cannabis startups because cannabis remains a Schedule I drug federally. Banks typically don’t want to get their hands dirty in cannabis capital, but it’s becoming more possible as activists push for full legalization. (Hint: If you’re looking for a bank that will give you a loan, it’s more likely going to be a local financial institution.)
Why are banks hesitant to get involved? It has to do with FDIC, the Federal Deposit Insurance Corporation. Businesses involved directly with the cannabis plant are viewed as taking on “existential risk” by the FDIC since cannabis is illegal under federal law. However, if you can prove that your business does not “touch” the plant, such as a machinery manufacturer, some banks may consider financing options.
Banks also want to avoid criminal liability, which they could face for aiding activities that are still classified as felonies federally. In some states where it is recreationally legal, like Colorado, the Department of Justice will tolerate cannabusinesses, but there’s not much security until it is federally legal.
As the stigma around cannabis fades, funding will become easier to obtain. For now, businesses that don’t want to wait for the legislation and culture to catch up should consider angel investor funding.
Cannabis Funding Options
Understand all of your cannabis funding options before you decide on the best path to capital.
Equity funding sells an investor (often a private angel investor) a piece of the company via a stake of ownership they can cash out when the startup goes public or gets acquired. Equity funding requires you to give up some ownership of the company, but the funds do not have to be repaid.
As the perceived risk of cannabis investments falls, investors are less interested in loan financing and more interested in equity to get larger returns.
Cannabis angel investors, such as Steve MacDonald, are individuals who use their personal funds to support startups they believe in and are more likely to be closely involved in the process than other funding sources such as venture capital funds. Angel investors provide personal capital in exchange for equity.
Debt funding requires a founder to take out a loan that must be repaid – and with interest. Debt lenders tend to use a straightforward process for applications, looking for clear numbers that will determine your lending viability, like your credit score and cash flow.
Cannabis loans (aka debt funding) typically fall into one of four types, including real estate loans, private loans, equipment leasing, and cash advances.
- Private Loans: From non-bank lenders, usually venture capital firms, these loans see rates between 8-25%, typically for growers and manufacturers rather than dispensaries. Most must be paid back within 1-3 years.
- Real Estate Loans: A real estate loan such as a short-term mortgage or bridge loan can help you acquire and develop land to grow or process cannabis. Terms are between 1-5 years and come with interest rates between 8-20%.
- Equipment Leasing: If you need cannabis farming equipment, you may be eligible for special financing if you don’t wish to buy it outright. Leases are funded over 1-7 years and hold interest rates between 8-20%.
- Cash Advance: Cash advances are sometimes the best option if funding is hard to come by. While these aren’t a loan, they can offer short-term financial relief as needed, but they are expensive and should be used as a last resort.
Acquiring the Best Funding for Your Cannabusiness
Choosing the best funding option for your cannabusiness will be determined by your level of involvement in the industry, your business model, the amount of capital needed, and your expected terms.
If you’re closely involved with the plant itself, you may find it harder to secure a bank loan with favorable terms, so finding an angel investor that’s a good fit is likely a better option, especially in the early stages. If your business model is more hands-off, you may be able to get financing from a bank if debt financing is what you’re looking for (and you search hard enough).
If you are looking at a large amount of capital needed, private investments in exchange for equity in the company are appealing. They don’t need to be repaid and often come along with guidance and expertise from angel investors who can help the startup grow in new ways.
You may be able to negotiate terms with a lender, but if you want to avoid repayment altogether, private angel investments are yet again looking good.
Consider what you need from your funding source, what you’re willing to exchange in return, and what is available to you to make your decision.
Get your Cannabis Startup Funded by an Angel Investor
Despite the progress seen in recent years among a few financial institutions, as well as the new legislation protecting hemp and CBD businesses, opportunities for traditional cannabis financing and loans can be slim. Angel investors are often the most available and flexible sources of funding for cannabusinesses and can provide an edge of expertise that new entrepreneurs can benefit from.
Cannabis angel investor Steve MacDonald has helped cannabis industry startups increase their margins with incredible growth month over month, even in the throes of a pandemic. His investment, Kush, is a supply chain solution marketplace for cannabis companies to buy from vendors, market products, and scale.
Read more about the Advantages of Angel Investor Funding.
Are you working on the next big thing in cannabis? Reach out to angel investor Steve MacDonald.