Guide to Cannabis Business Loans & Where To Get Them

Get a Complete Understanding of the Cannabis Business Loan Environment, Who The Biggest Lenders Are & What to Focus On To Secure a Loan

Whether you’re starting a cannabis dispensary, cultivation facility, or product line, having access to capital is crucial. Cannabis business loans are specialized loans designed to meet the unique needs of the cannabis industry, providing you with the financial resources to launch and grow your business. In this blog, we’ll cover everything you need to know about Cannabis Business Loans, from the different types available to how to secure one for your specific needs.

Why Most Banks Avoid Cannabis Business Loans

Banks have long been the go-to source for loans and financing for businesses across various industries. However, when it comes to the cannabis industry, banks tend to avoid providing loans to these businesses. There are several reasons for this cautious approach.

The Industry Is Still Relatively Young

The cannabis industry is relatively new and still in its early stages of development. This means that there is a higher level of turbulence and volatility compared to more established industries. With this higher level of risk, banks are naturally more hesitant to lend money to businesses within the cannabis industry. They are concerned about the potential for business failures, as startups and even more established cannabis companies face challenges in navigating a rapidly changing market.

Legal Complexities in the USA

In the United States, the legal landscape surrounding cannabis adds another layer of complexity for banks. While some states have legalized cannabis for medical or recreational use, it remains illegal at the federal level. This creates a legal gray area that banks are wary of entering. Lending to cannabis businesses puts banks at risk of violating federal anti-money laundering laws, which can have serious legal and financial consequences. There is also the fear of losing FDIC insurance, as the Federal Deposit Insurance Corporation (FDIC) could potentially penalize banks that engage in lending to cannabis businesses.

Cannot Enforce Loan Contracts

Furthermore, without federal legal protection, banks may face difficulties in enforcing loan contracts or collecting on defaulted loans. The lack of clarity around the legality of cannabis at the federal level leaves banks exposed to potential legal and financial risks. This uncertainty makes them hesitant to provide loans to cannabis businesses.

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What Types of Cannabis Business Loans Are Available?

There are several different types of cannabis business loans that operators in the cannabis industry can consider. These loans are designed to provide financial support for various aspects of running a cannabis business, including startup costs, equipment financing, regular business expenses, and real estate purchases.

Cannabis Startup Loans

These loans are typically used to cover the initial costs of setting up a cannabis business, such as licensing fees, permits, and equipment. For lenders, there can be a higher level of risk associated with startup loans, as these businesses do not yet have a proven track record or cash flow. As a result, lenders may charge a higher interest premium than a regular business loan to compensate for this increased risk.

Equipment Financing Loans

These loans are specifically intended to help cover the cost of purchasing or leasing equipment necessary for the operation of a cannabis business, such as cultivation equipment, extraction machines, or point-of-sale systems. The perceived risk for lenders in equipment financing loans can vary depending on the specific equipment being financed, and the ease of selling the equipment in case the bank needs to repossess the asset.

For example, financing for high-tech extraction machines may have a lower perceived risk compared to financing for specialized cultivation equipment. The interest premium for equipment financing loans may be slightly higher than a regular business loan, but it is often more affordable than the premium charged for startup loans.

Regular Cannabis Business Loan

Regular business loans are also available for cannabis business operators to cover various business expenses such as inventory, overhead costs, and build-outs. These loans are typically less risky for lenders compared to startup loans, as the business already has a track record and cash flow.

The interest premium for regular business loans in the cannabis industry can vary depending on factors such as the business’s financial history, credit score, and collateral. However, on average, the interest premium for regular business loans is generally lower compared to startup loans.

Hard Money Lenders

Lastly, hard money lenders are an option for cannabis business operators who may not qualify for traditional bank loans. Hard money lenders are private individuals or companies that provide loans based on the value of the collateral, such as real estate. These loans can be more accessible for cannabis businesses that may have difficulty obtaining financing from traditional lenders due to the industry’s legal and regulatory complexities. However, hard money loans often come with higher interest rates and fees compared to traditional loans due to the perceived higher risk.

What are the Requirements for a Cannabis Business Loan?

When it comes to securing a loan for your cannabis business, there are specific requirements that lenders in the industry consider before providing financing. Since the cannabis industry is highly regulated, lenders need to carefully assess the risks involved in lending to a cannabis business.

Business Plan

A business plan should outline your company’s goals, strategies, and financial projections. It should demonstrate that you have a clear understanding of the cannabis industry, its challenges, and opportunities. By presenting a well-thought-out business plan, you can show lenders that you have a solid foundation and a path to success.

Financial Statements

In addition to a comprehensive business plan, lenders will also look at your financial statements. They want to see that your cannabis business is financially stable and capable of generating enough revenue to repay the loan. This includes providing detailed information about your revenue streams, expenses, and profit margins. Lenders will also review your balance sheet and cash flow statement to assess your company’s financial health.

Management Team & Industry Experience

Lenders want to know that you have a skilled and knowledgeable team in place to successfully navigate the challenges of the cannabis industry. This includes providing resumes and biographies of key management personnel, outlining their relevant experience and expertise.

Records of Compliance

Given the highly regulated nature of the cannabis industry, lenders will also require you to be compliant with all applicable laws and regulations. This includes obtaining all necessary licenses and permits, as well as having a thorough understanding of local, state, and federal regulations. Lenders want to mitigate their risks and ensure that your business operates within the law’s confines.

Did you know? GrowerIQ has an industry-leading Seed-to-Sale Cannabis Software (with quality management built in) that is designed to uncomplicate cannabis production for cannabis producers throughout the world.

Learn more here.

Collateral Backing

Lenders may also require collateral to secure the loan. This can include physical assets such as real estate, equipment, or inventory. Since cannabis is still federally illegal, many traditional lenders are hesitant to provide loans without collateral to mitigate their risks.

What is the Typical Interest Rate for Cannabis Business Loans?

Interest rates for cannabis business loans can be significantly higher than other business loans for a variety of reasons. The cannabis industry is still relatively new and faces unique challenges and risks that traditional industries do not. These challenges can make lenders more wary and therefore require higher interest rates to compensate for the increased risk.

In fact, the average interest rate in the Cannabis Sector can be as high as 20%, according to a report published by Reuters. This is in contrast to the 5.75% – 12% average interest rate for business loans from traditional banks, as per Bankrate as of October 2023.

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Who Are the Biggest Cannabis Business Lenders?

When it comes to financing your cannabis business, it’s important to choose the right lender that understands the unique challenges and opportunities of the industry. Let’s take a closer look at some of the top cannabis business lenders available today.

FundCanna (USA & Canada)

FundCanna, with its team of financial experts, has provided nearly $20 billion in funding over the past 20+ years. Their mission is to help small and medium-sized cannabis companies thrive by offering the lowest rates in the industry. With a focus on cannabis businesses, FundCanna is dedicated to providing access to capital that can help these companies scale and succeed.

AVANA Capital (USA)

AVANA Capital is another prominent lender in the cannabis industry, offering flexible and affordable solutions to empower entrepreneurs. They understand the challenges faced by cannabis business owners and aim to provide reliable financial support to help them reach their full potential and succeed in their ventures.

Socotra Capital (USA)

Socotra Capital has been a pioneer in cannabis real estate financing, closing cannabis loans across the United States for the past 5 years. As a premier private money lender, they can fund a wide range of cannabis opportunities, including industrial warehouses, retail dispensaries, and facilities that operate across the entire spectrum. They offer quick closings and even allow for cash-out refinances.

Seed to Sale Funding (USA)

Seed to Sale Funding is a nationally recognized consulting company that specializes in raising debt capital for all facets of the cannabis industry. They work with a curated network of private lenders, REITs, and hard money lenders to provide financing options for grow/cultivation, manufacturing, and ancillary businesses. Their extensive experience in commercial lending and their transaction history make them a reliable choice for cannabis business loans.

Alterna Savings (Canada)

Alterna Savings has been supporting regulated medical marijuana producers since 2016. As one of the first financial institutions to enter the cannabis industry, Alterna offers tailored products and services to meet the needs of cannabis producers. They understand the unique requirements of the industry and are committed to helping cannabis businesses succeed.

Merchant Growth (Canada)

Merchant Growth is another Canadian lender that supports the cannabis industry. They offer fast and convenient financing options, such as merchant cash advances and business lines of credit, specifically designed for online and physical stores in the cannabis sector. Their adjustable financing conditions allow businesses to pay more during busy periods and less during slower times, providing the flexibility needed to navigate the cyclical nature of the industry.

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Latest Developments in Cannabis Loan Financing Options

There have been some exciting developments in the world of cannabis loan financing options in the US in September 2023.

Connecticut Launches New Loan Program for Cannabis Companies

One notable development comes from Connecticut, where a new loan program has been launched specifically to support marijuana social equity applicants, municipalities, and nonprofits. This program aims to help these groups rehabilitate, renovate, or develop unused or underused real property for use as a cannabis establishment. This is a great step forward in promoting diversity and inclusion within the cannabis industry, as it provides financial support to those who have historically been disadvantaged in entering the market.

Senate Banking Committee Is Aiming to Enable Banking for Cannabis Businesses

On a broader scale, the Senate Banking Committee is set to hold a hearing on a bill that could revolutionize the banking landscape for cannabis businesses. Currently, it is extremely challenging for cannabis business owners to open bank accounts, even in states where marijuana is legal. However, the Secure and Fair Enforcement Regulation Banking Act, introduced by a bipartisan group of senators, aims to provide legal protection to banks and other financial institutions that offer services to state-legal marijuana businesses. This would allow cannabis businesses to access traditional banking services without the fear of breaking the law. This bill has the potential to greatly enhance the viability and growth of the cannabis industry by enabling businesses to operate more efficiently and securely.

Cannabis Business Loans Are Accessible In Other Developed Markets

While these developments are taking place in the US, it’s worth noting that cannabis business loans have already become well-established in other markets such as Canada, Israel, and Europe. These regions have recognized the economic potential of the cannabis industry and have implemented robust loan programs to support its growth. By offering financial assistance to cannabis entrepreneurs, these countries have been able to foster innovation, job creation, and economic development within the industry.

Overall, these recent developments in cannabis loan financing options mark an exciting time for the industry. With continued support and access to financing, cannabis businesses have the potential to thrive and contribute to the broader economy.

How GrowerIQ Enables Cannabis Businesses to Secure Loans

Banks are known for their strict focus on compliance when funding cannabis business loans. This is because the cannabis industry is highly regulated and poses unique risks due to its historical legal status. Banks want to ensure that the businesses they fund are operating within the boundaries of the law and adhering to all necessary compliance requirements. Failure to do so can result in legal consequences and financial risks for both the bank and the business.

GrowerIQ Streamlines Compliance Requirements

GrowerIQ’s compliance module plays a vital role in helping cannabis cultivators streamline their cannabis compliance requirements. As the only cannabis software designed and controlled to help maintain global manufacturing standards, GrowerIQ enables cultivators to access every market on the planet. This is crucial because different markets have different regulations and compliance requirements.

With GrowerIQ’s software, cultivators can easily track and manage all compliance-related tasks, including licensing, reporting, and quality control. By automating these processes, GrowerIQ saves time and resources, allowing businesses to focus on what they do best: cultivating high-quality cannabis. Ultimately, GrowerIQ’s compliance module ensures that cannabis cultivators meet all necessary regulatory requirements, giving them the confidence and ability to access funding from banks and enter new markets with ease.

Discover how GrowerIQ’s seed-to-sale software can help you set up all of the components of a successful cannabis production operation without any hassle. Questions we haven’t covered? Please reach out and let us know. GrowerIQ serves clients coast to coast, and we’re ready to help your team today.