What You Need to Know When it Comes to Cannabis Business Loans

When it comes to securing a business loan for a cannabis company there are some things to consider outside of the normal lending parameters. Traditional lenders aren’t all-in just yet, so it usually requires non-traditional money and even with that there are some things to consider.

Even with hard money or asset-backed loans and the high interest rates that come with them, the majority of lenders are proceeding with caution when it comes to lending to any business involved in the cannabis industry, even in states where it is legal.

The Cannabis Industry is Still Very New

Anytime a new industry is born, lenders are going to proceed with caution. Especially cannabis, which was once illegal and now legal in some situations and in some states. There is a lot of information to digest and as it becomes more seasoned we will see more lenders come forward.

Currently, beggars can’t be choosers. If a cannabis company like RoyalCBD.com needs a loan they must go where options exists, and it isn’t going to be the neighborhood bank down the street. Even the high-rate credit card processing backed loans are hard to secure, as some cannabis companies are having their merchant accounts shut down.

The industry is just very new, so be prepared for limited options along with high fees and rates.

The Legal Risk is Not 100% Known

If a cannabis company in California that is operating 100% within the law is seeking a loan and a lender in Montana, where cannabis is not legalized for recreational use is interested in offering them the financing they need are there any legal risk involved? It’s a very gray area.

This is one of the main reasons lenders are holding back. They just don’t know. There aren’t clear and defined laws and rules laid out that apply to everyone. Until that happens there will continue to be a shortage of funding and loan options for any business tied to cannabis.

Once the federal government steps in and legalizes it across all state lines then we will see banks and lenders offer programs.

Production and Availability Uncertainty

What if a financial institution isn’t worried about the laws? Let’s pretend a bank in California (where cannabis is legal for recreational use and selling) is approached by a local company, also in California. They only sell locally in-store so there are no cross-border issues. It should be an easy deal to underwrite and close, correct?

Not so fast.

What if the company runs into issues with their supplier? What if the farm they buy from loses its crop? Then what? If they have no product to sell there is no revenue coming in. No revenue coming in means the loan won’t get paid back.

There is a lot of uncertainty when it comes to production and availability. 

Highest Risk vs. Reward in Finance

So far we have outlined a lot of risks. There are very little upsides for a bank to lend to a cannabis company. Even at high rates there is still risk. The financing company could lend the same amount of money to more stable industries and even at lower interest rates in the long run their risk is much lower, and a more calculated and predictable return is almost guaranteed.

There are some companies, however, like private funds, that like high risk deals. They charge high interest rates and pad the deal with high fees. A cannabis company might have to pay points on the front end as well as the back end. Highly costly, but when there are no other options it becomes attractive.

Cross Boarder Liability and/or Involvement

Even the CBD industry is facing issues getting business loans. Even though CBD containing no THC is legal, there are some states that will not allow it to be shipped to them. So this is also a reason for concern.

What happens if banks start lending more freely to CBD companies and then the government steps in and shuts some down for selling across boarders? Then what? They are a major risk as well, and even though the perception is that CBD is legal everywhere, there are still a lot of confusing details and circumstances.

Big banks don’t want anything to do with it just yet. But, once it’s legal everywhere with no limitations and no stipulations, they are all going to want to get in on the action and I would expect to see a lot of cannabis-specific business financing products to roll out.

Lenders Don’t Fully Know How to Underwrite or Evaluate Business Plans

Banks and lenders have seen hundreds of thousands, if not millions of business plans over the years. But anything related to cannabis is new to them. It’s hard to underwrite a business loan when you don’t fully understand the business plan.

Will they eventually understand it and come up with more standard underwriting guidelines? Of course, but I wouldn’t expect to see that until federal legalization is rolled out (if ever).

Again, this is why non-traditional and hard-money are the two top options for any business linked to cannabis.

Final Thoughts

Until cannabis is federally regulated and legal in all U.S. states there are going to be issues, based mainly on the uncertainty and potential dangers. Remember, a lender makes its money when a loan is paid back. With so much instability in the cannabis market their risk exposure is huge.

If you find a lender that will entertain a loan in the current market the rate will more than likely be high and the terms not so favorable, but that is what is available currently. If you want funding then you either accept it for what it is or wait it out, but there is no telling when the laws and regulations will be crystal clear, opening the opportunity for more traditional lenders to get involved.

The post What You Need to Know When it Comes to Cannabis Business Loans appeared first on Tweak Your Biz.

source https://tweakyourbiz.com/finance/cannabis-business-loans