Cannabis Business Loans: How Does it Work?

Cannabis is now legal in 33 states for medical use and in 11 states for recreational use in adults over 21, which means would-be business owners are rushing to start cannabis businesses in many states. While some entrepreneurs may assume that obtaining cannabis business loans is as simple as walking into your local bank and filling out an application,  businesses looking for cannabis financing face a special set of challenges due to the differences in legality on the state, federal, and local levels. Commercial lenders specifically catering to the cannabis industry have cropped up in order to help cannabis business owners obtain financing legally and navigate the legal requirements for their businesses. If you’re considering applying for a cannabis business loan, here’s how the process works. 


Step 1: Understand the Challenges and Choose a Lender

The decriminalization movement is spreading across the country, but cannabis business owners still face major challenges in obtaining financing regardless of the laws in their state. Cannabis remains a Schedule I controlled substance at the federal level, which means that any transactions relating to it, even in an auxillary way, are illegal. Therefore, traditional financial institutions that are regulated by the federal government, such as banks and credit unions, are unable to legally handle capital that is connected to cannabis. Although some state and local institutions have begun experimenting with providing banking services to cannabis business owners, they do not offer financing options because of the Bank Secrecy Act. The Bank Secrecy Act declares that  banks and credit unions are subject to the same regulations around money laundering that individuals are, providing a loan to purchase real estate or equipment, among other things, would be considered money laundering. The Bank Secrecy Act also requires that banks flag transactions of 5,000 dollars or more that may be associated with illegal activity, including cannabis sales.  Where does this leave cannabis business owners when it comes to financing? Prior to 2018, most cannabis business owners used hedge funds and private investors to receive financing for their businesses. Since the first commercial cannabis lender was founded in 2018, today, business owners have more options, including working with lenders who specialize in their specific industry and understand the unique challenges associated with the business. 


Step 2: Choose a Loan Type 

Because commercial cannabis lenders are entrenched in the industry and understand the specific needs of cannabis business owners when it comes to financing, you’re likely to find a loan option that suits your needs. Commercial lenders typically offer two main types of financing: debt funding and equity funding. When using debt funding, business owners take on debt by taking out a loan. This debt is then paid back with interest in regular installments.  Equity funding requires that the business owner/borrower offer shares of their company in exchange for financing capital. Rather than paying back the loan in installments, the money is paid back when the company is sold or in the form of dividends. This type of funding requires that a company exist and hold value, so it is most appropriate for existing businesses. Depending on what the funding will be used for, cannabis business owners then select either a private loan, real estate loan, equipment leasing loan, or dispensary cash advance. The primary difference between these types of loans is how the money will be used, the term length, and interest rates.

Step 3:  Gather Your Documentation and Apply for a Loan

Cannabis businesses may not be traditional, but a commercial cannabis lender is going to need ample proof that a business is capable of paying back their loan. Therefore, it is important that applicants have a good credit score (ideally 700 or above), strong repayment history, and no bankruptcies on their records.  Applicants will need to provide balance sheets, income statements, and bank statements, a credit report, business plan, and evidence of capital needs. Most lenders will also require a list of key management personnel and a list of all active cannabis licenses held. Once this information has been gathered, you’re ready to apply for your loan.


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