As cannabis becomes increasingly legalized and decriminalized for medical and recreational use across the United States, would-be entrepreneurs are looking for options when it comes to financing their businesses. At first glance, it might seem like financing a cannabis business would be no different than taking out a loan to start a yoga studio or a restaurant, but the huge variation in laws across the local, state, and federal levels makes financing a cannabis business a little more challenging. If you’re interested in taking out a cannabis business loan, you might be wondering what’s involved and how to get one. Fortunately, the options are expanding day by day.
What Regulations Impact Cannabis Business Loans?
Table of Contents
The first thing to understand is that while cannabis may be legal for use in your state, it is still considered a Schedule I controlled substance at the federal level. This affects cannabis business loans because traditional financial institutions, like banks and credit unions, are regulated by the federal government, which views any transaction connected to cannabis as an illegal activity. This impacts even transactions like purchasing real estate and marketing your business, as the federal government considers this to be money laundering. While it may be possible to work with a local or state-chartered bank or community credit union, all banks are subject to a regulation called the Bank Secrecy Act that requires banks to flag transactions of 5,000 dollars or more that may be associated with illegal activity, including cannabis sales. The Bank Secrecy Act is one of the major obstacles facing cannabis business owners looking for financing options.
Is it Possible to Get Financing For a Cannabis Business?
Despite the major issue with financing through traditional financial institutions, it is possible to get a cannabis business loan through a commercial lender, angel investor, venture capital firm, or friends and family. The first licensed commercial lender focusing on the cannabis industry was founded in 2018, so this option is relatively new.
What Types of Cannabis Business Loans are Available?
The two primary categories of cannabis business loans are debt funding and equity funding. Debt funding is the type of financing most people are familiar with, as it usually involves taking out a loan or using a business credit card. With debt funding, the borrower incurs debt and then pays it back over time, plus interest. When using equity funding, the business owner offers shares of the company in exchange for financing, and the lender or investor gets their money back as either dividends or profit when the company is sold. Cannabis business loans usually come in the form of private loans, real estate loans, equipment leasing loans, and dispensary cash advances.
What Information Do I Need to Provide to Apply for a Cannabis Business Loan?
While financing for cannabis business loans does not come through traditional avenues, it does carry with it some traditional aspects, such as the information needed to apply for a loan. Lenders will request, at a minimum, your personal credit report (and the credit reports of your business partners), three to six months’ worth of bank statements, balance sheets, income statements, and your capital needs. You and your business partners should have credit scores of at least 700, have a history of making your payments on time, and have no bankruptcies on your record. Because the cannabis industry is still considered somewhat risky, lenders may also want to review a list of your key management personnel and a list of all active licenses held. Make sure you have all of your documentation together prior to applying for your loan in order to move the process forward as smoothly as possible.
