The legal cannabis industry generated billions of dollars in sales in 2017, and experts predict this number could rise in 2018. As the sector grows, more companies are looking for finance options from banks and other lenders.
Which Lenders Provide Cannabis Companies With Finance?
Despite the growth of the legal cannabis industry in recent years, some lenders are still reluctant to provide cannabis and hemp companies with finance. Traditionally, cannabis and hemp farmers raised funds from family and friends or secured seed capital or crowdfunding investment from other companies. In 2016, the Securities Exchange Commission introduced regulations on cannabis-related crowdfunding operations.
In 2018, the U.S. Small Business Administration (SBA) introduced new lending rules for the cannabis and hemp industry. These new regulations could prohibit cannabis companies from applying for SBA-backed loans.
Currently, farmers and dispensary owners have limited options when it comes to taking out a loan. However, this could change in the next few years as the cannabis sector becomes more profitable. Research shows that the legal cannabis market in the United States will hit $25 billion by the year 2025, according to analytics firm New Frontier Data
Still, business owners have various financing options to choose from, including short-term loans and longer-term lending options. Short-term loans tend to come with higher interest rates; however, borrowers usually receive funds in a quick timeframe. These funds can cover the costs of property, equipment, and inventory on a cannabis or hemp farm or help cannabis companies expand their business. Borrowers might need to secure funds in order to maintain a grow house.
Other loan options include:
- Working capital loans: These unsecured loans provide cannabis companies with the funds they need to hire and manage staff and carry out day-to-day business tasks.
- Real estate loans: These secured loans let cannabis companies use real estate as collateral for a loan. The amount a business owner can borrow will vary depending on the lender, but real estate loans could be worth hundreds of thousands of dollars or more.
- Dispensary Cash Advance: This lending option provides cannabis companies with the funds they need to support their inventory and purchase new equipment. Borrowers will receive a cash advance and have to pay this back at a later date.
Borrowers can compare different lending options by using a loan comparison tool. Here, business owners can view various financial products in one place and choose the right loan based on their budget and individual circumstances.
Which Cannabis Companies are Eligible for a Loan?
Different financial institutions have different criteria when assessing borrowers for eligibility. Typically, cannabis companies need to be in operation for at least six months before they can secure finance. (They might be incorporated as an S corporation, limited company, or LLC). These companies will need to have a good credit score, too.Business owners who have a good credit rating will be able to apply for loans with low interest rates and more flexible repayment terms. Business owners who have a poor credit rating, however, will have to apply for loans with higher interest rates and will have less choice. Cannabis business owners should always check their credit rating before they apply for a loan. This way, they can check previous financial commitments and apply for a product based on their financial history.Other eligibility requirements include a solid business plan and no criminal record.
What Should Borrowers Look for When Taking Out a Loan?
Borrowers will need to consider a number of factors before taking out a cannabis and hemp loan. Ultimately, business owners should choose a loan provider who offers good value for money and low interest rates. This will make the loan more affordable in the long run. Business owners should also choose a company that has a number of communication options (phone, email, live chat, etc.), which will make it easier when discussing the terms of the loan or making repayments.
Borrowers should also check out the repayment terms on a loan. Usually, business owners will need to repay their loan on a monthly basis. Late payments, however, could result in additional fees. Lenders will penalize borrowers who are unable to keep to the terms of their cannabis loan and can report late payments to one of the three credit reference bureaus in the U.S.: Equifax, Experian, and TransUnion. This could make it more difficult for borrowers to apply for finance in the future.
As more states legalize cannabis and hemp for medical and recreational use, more people will start marijuana-related businesses. Many of these people will require funds to kickstart their new venture or cover a shortfall in funds. This is where a good loan product can help. Choosing the right loan with the right interest rates and repayment terms can help a business manage their finances and get quick access to the funds they need.