Cannabis and Hemp Industry Loans

Cannabis and Hemp Industry Loans

The cannabis and hemp industry is no longer an underground enterprise due to changes in state laws and the acceptance of marijuana as a medical treatment and recreational substance. While growing and selling these plants is still illegal in some areas, in others, it has become a profitable and aboveboard business. Since legal issues do still exist, financing these businesses can be tricky, but several financing options do exist.

Cannabis and Hemp Basics

The overall cannabis market is expected to hit $25 billion by 2025. The market for hemp-derived cannabidiol (CBD), a product touted for its medical uses, should hit $1 billion by 2020. The entire industry is booming, in part because the medical community has started to embrace the health benefits of both hemp and marijuana.

The legal landscape has changed as well, with states like California and Colorado completely legalizing these substances. Other states such as Illinois have made medical marijuana legal and decriminalized recreational use. States such as Texas, Oklahoma and Kentucky still make cannabis and hemp use illegal for any reason.

The federal government also considers their use a crime, but under the Obama administration, state laws were recognized and federal law enforcement did not intrude. Current Attorney General Jeff Sessions seemed poised to enforce these laws, but the Trump administration has since backed off this stance, much to the relief of those in the industry. However, this contradiction between state governments and the federal government makes acquiring funding for cannabis and hemp production and sales more difficult.

Financing Options

For those who want to break into the industry, getting a bank loan is highly unlikely. Most banks are insured by the FDIC, or Federal Deposit Insurance Corporation. The FDIC will not insure any bank that loans money to companies that break federal law, so that eliminates the entire cannabis hemp industry. Some FDIC banks will loan money for equipment since that is a step removed from the actual product. Fortunately, those interested in the business can secure other forms of financing.

Hard Money/Private Investors

Some private investors actually specialize in cannabis and hemp hard money loans as well as other high risk ventures. Collateral for these hard money loans is based on the real estate in question and not on the borrower’s current financial status. The lenders will set some borrower qualifications, although these will be less stringent than a traditional bank’s requirements. In general, hard money lenders are a source for business owners who cannot get regular funding due to poor credit scores or those engaged in a controversial enterprise such as cannabis.

Those using hard money loans to start their business should expect to pay their lenders significantly higher interest rates, well over 10%, and have a short term to repay them, usually a year or two. At the end of the term, the loan must be repaid or other financing secured. Until the balance is due, the borrower only makes interest payments, which is a significant advantage for borrowers. The short-term nature of the loan is often sufficient to launch a business start-up.

Some private investors deviate from this formula and provide start up money in exchange for part ownership. In most of these cases, the borrower retains the power over day to day operation decisions, a long term arrangement that can benefit both parties. This arrangement also gives the borrower more time to make the business profitable.

In both instances, the loan application process should be fast and efficient, taking less time than a bank’s more complicated procedure and allowing the business to begin operations quickly.

Niche Business Loans

Niche business loan companies are another option for small businesses in general and cannabis entrepreneurs in particular. These loans frequently work for those who cannot get bank financing and need quick access to their funding. Like most financing options, using one of these companies has both advantages and disadvantages.

Applying for these loans is extremely convenient and can be done from home at any time. Also, when borrowers provide their financial information, they are making it available to a number of lenders, but their credit score doesn’t suffer since only one source is accessing their credit report.

Borrowers also are able to compare all of their options at once and find the best terms possible, reducing their loan costs.

The major disadvantage is the interest rate. Like hard money loans, the rates are significantly higher than bank loans. Also, these loan companies are relatively new, so they have a higher chance of failing than other, more established lenders.

For those entering the cannabis/hemp business, online business loans may be a good option. However, the interest rates and other terms range widely with these companies, so borrowers need to carefully research the loan before signing any loan contracts. They should also check out the company’s reputation and history before entering into any agreements.

The cannabis/hemp industry is thriving and promises investors a healthy return on their money. Since there are federal legal issues, finding financing can be complicated. Most banks will not loan money to borrowers for this purpose, so they will need to turn to private investors, hard money loans, and home equity loans. In some cases, private investors will assume part ownership in return for their money.

The federal government has shown recent signs of softening on this issue, so borrowers may be able to acquire bank loans in the not-too-distant future.

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May 21, 2019No comments

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