Cannabis Financing Alternatives in Complex Markets
Finding the right resource for business financing comes with its own set of challenges, but those in the cannabis space, in particular, have an extra set of hurdles (or two) to climb over. Much like the mining and construction industries, cannabis falls into the high-risk category leaving entrepreneurs seeking traditional loans at a dead end. While the successful push in licensing continues, a lack of access to institutional banking has prolonged the process for many and stunted the full potential of growth for the cannabis market. It's a reality most evident in the United States where companies that received the legal go-ahead as early as 2014 are still not open for business. The good news? Alternative cannabis financing options are popping up in unconventional places. It's merely a matter of knowing where to look, and the steps you can take to qualify.
Obstacles in Cannabis Business Financing
Currently, in the U.S., 11 states (and D.C.) have legalized recreational marijuana, and 33 more states have legalized its use medicinally. Despite this growing trend, the substance is still federally illegal, creating a huge barrier for companies when it comes to financing and banking. As cannabis companies patiently wait for the SAFE Banking Act to pass in the U.S., they continue to struggle to set up institutional bank accounts, let alone access funds to start, operate, or expand their company.
Risky business is the name of the game, at least from those who hold the cash. Financiers see two types of risk in cannabis business financing: legal ambiguities - especially in the U.S. - and systemic risk in the form of assets that cannot easily transfer in the face of dissolution. In 2018, when the Bank of Montreal invested in several large cannabis companies, the tide toward institutional financing was expected to turn toward the cannabis industry. But it didn't. Instead, the majority of Canadian business owners are still struggling to secure cannabis financing, all in an environment where legalization of cannabis is on a country level.
Alternative Cannabis Financing Solutions
Although one door has closed, several others have opened. Traditional lenders unaccustomed to providing credit lines for assets means there is an appetite for alternative cannabis financing options. Private investors, local credit unions, self-funding, crowd-funding, celebrities, and holding companies are just a few of the choices some start-ups have pursued.
There's also a more direct level of financial support offered by companies selling cannabis equipment and services. Where other private lenders struggle to negotiate the risks associated with cannabis business financing, equipment manufacturers, in particular, understand the inherent value and potential -- leading to internal financing solutions and in some cases access to extended financial networks.
Approach Cannabis Financing with a Plan
Regardless of how you choose to pursue financing for your cannabis business — private lenders, manufacturers, angel investors — the key to securing the money you need is approaching any investor with a well-researched business plan and the data to back it up.
- No Time for Half-baked Ideas | In an age of legitimization, cannabis companies can no longer rely on half-baked ideas. Just like any loan application, seeking cannabis financing requires an understanding of what the money will be used for down to the very last cent. Otherwise, it is challenging for a lender to determine how much financing you actually need. It can be daunting running those numbers and establishing a clear growth plan, but doing so gives a lender the assurance you've done your research, know what you want, and how you're going to use it. From equipment needs, and raw material to personnel, a solid plan includes identifying the costs associated and carefully outlining how every item of your budget will be spent.
Quick tip: You wouldn’t go back to the bank multiple times changing the loan amount for a home, and you shouldn't do it now. Take time to get those numbers right the first time around.
- It is a Team Effort | Investors want to be privy to certain information about your company, including details about your team and their roles. It's always valuable if you can create a way to introduce potential investors to those involved in your company's purchasing decisions and expansion plans. There's nothing worse than reaching the finish line only to be told that silent partner 'Joe', who your lender is unaware of, now has a few changes to the application.
Quick Tip: Explain who will handle different aspects of the capital and how their role influences the rest of the team, the investment funds, and your future growth.
- Deliver a Pitch They Can’t Refuse | Beyond explaining how you plan to use any financing, how do you plan to expand your business, increase revenue, and make money for yourself, your company, and your investors? Cannabis business financing — or any business financing, for that matter — is about more than just acquiring new equipment or expanding building space. Once those goals are accomplished, where will the business go from there, and what do the key milestones look like? Lay everything out on the table, and be transparent in your intentions with a comprehensive pitch deck. Remember, just because you may not be walking into a bank, you are asking for a hefty sum of money that deserves the same professional approach.
Quick Tip: Build an impressive business plan that leaves nothing to guess, and in turn, an offer investors can't refuse.
Financing through Vitalis
Manufacturing companies like Vitalis even offer internal financing solutions and access to a network of financing partnerships. Where other private lenders struggle to negotiate the risks associated with cannabis business financing, equipment manufacturers like ours understand the inherent value and potential within the cannabis industry.
Ready to get the funding to grow your business? Contact the team at Vitalis today and learn more about our unique equipment financing solutions.
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