Apply for a cannabis business loan follows nearly the same process as applying for other types of business loans. Entrepreneurs interested in opening farms, manufacturing facilities, delivery services, and storefronts will likely encounter a few small differences. Overall, anyone who has applied for a business loan before will recognize the process when seeking money to open or grow a cannabis business.
Business leaders who have not applied for loans, however, might feel some anxiety as they borrow money from banks and private lenders. The following things to consider can help entrepreneurs prepare for the cannabis business loan process and, hopefully, secure funding for their ventures.
Lenders Can Consider Personal Credit Scores Before Approving Loan Applications
Lenders usually perform hard credit checks to determine whether they should risk lending money to business owners. Cannabis business owners can prepare for credit checks by requesting copies of their credit histories. Any person can get one free credit report per year from the major credit reporting agencies (Equifax, Experian, and TransUnion).
Correcting Errors on a Credit Report
Ideally, business owners should request their credit reports several months before they apply for loans. If any of the reports contain inaccurate data, it can take weeks or months to petition the credit reporting company for a correction.
- Send a dispute letter to the company that lists inaccurate information.
- Wait for the credit reporting agency to conduct an investigation and write a report.
- Send a dispute letter to the company or person that reported the inaccurate information.
- Wait for the reporting company to contact the credit agency to fix the mistake.
About one in five people have errors in their credit reports, so every entrepreneur should scrutinize their reports before applying for loans.
Improving Credit Scores
A loan applicant’s credit score can affect whether the person receives a loan and how much interest the lender charges. People with higher credit scores tend to enjoy higher acceptance rates and lower interest rates.
Applicants without “Very Good” or “Excellent” scores, usually defined as 799 to 850, have better chances of securing low-interest loans.
Anyone with a score under 799 should try to improve the rating before applying for a business loan. Some of the fastest ways to increase credit scores include:
- Making all payments on time (including credit card, car loan, student loan, and utility payments) to establish a trustworthy payment history.
- Reducing the debt to credit ratio by repaying high-interest debt and keeping the accounts open.
- Applying for a mixture of installment (car loan, mortgage, etc.) and revolving (typically credit card) accounts.
It takes time to improve credit scores. Ideally, business owners will give themselves several months or a year to repair their scores.
Lenders Will Want to See a Detailed Business Plan
Anyone who wants to borrow money to start or grow a business needs to prepare a detailed business plan that shows potential lenders how the enterprise will generate enough revenue to repay the loan. An effective business plan should include at least nine sections:
- An executive summary that provides a brief overview of the business’s goals, market, growth potential, competition, and funding requirements.
- Overview and objectives that go into detail about what the cannabis business will achieve.
- Products and services that the cannabis business will offer that make it stand out from similar companies.
- Market opportunities that describe an area’s need for the cannabis business and room for expanding into other areas.
- Sales and marketing opportunities that will attract consumers or clients to the cannabis businesses.
- A competitive analysis that describes the challenges and opportunities presented by other cannabis businesses in the area.
- An operations plan that shows how the business will control expenses, fulfill consumer needs, hire experienced employees, and generate profits. This section should also include information about potential locations as well as the permits and licenses required to operate the cannabis business.
- A description of the business’s management team and how each person will contribute to the venture’s success, including previous experience in the industry.
- A detailed financial analysis that includes a balance sheet, income statement, cash flow statement, operating budget, and break-even analysis.
A well-made business plan can become the difference between getting approved or denied a loan. Business owners without much experience writing business plans should consider hiring consultants. Writing an accurate business plan means that owners need to reveal the positive and negative aspects of their companies. Even experienced entrepreneurs can struggle to remain objective while writing new business plans, so it makes sense to hire a consultant to at least assist in this portion of the funding search.
Understand Licensing and Permit Requirements
Licensing and permit requirements for cannabis businesses can vary significantly from state to state. Anyone who wants to start a farm or dispensary needs to understand the state’s requirements.
Many states and cities limit the number of permits that they will distribute. Limiting the number of permits helps prevent cannabis storefronts from crowding out other businesses. It also helps lower competition between dispensaries. A cannabis storefront will struggle to survive on a street that has a dozen other dispensaries within walking distance.
Entrepreneurs can learn more about licensing and permit requirements by visiting the cannabis portals of various states, including:
All states with medicinal and recreational cannabis have pages that can help business owners learn more about their licensing processes. Entrepreneurs should consult the state pages to become familiar with the process. They might also want to talk to lawyers or consultants in the cannabis licensing industry for additional help. Missing even one piece of information can delay an application significantly.
Prepare a List of Expenses the Cannabis Business Loan Will Cover
A detailed business plan should include all of the business’s anticipated expenses. Entrepreneurs applying for cannabis business loans should also make a separate list of expenses that they expect the loan to cover.
Some common expenses for cannabis dispensaries include:
- Legal fees
- Commercial real estate rental
- Property improvement
- Marketing (signage, websites, online ads, etc.)
- Security system with video cameras and metal detectors
- Furniture and displays
- Office equipment (computers, copy machines, safes, etc.)
- Security guards
- Inventory and packaging
Common expenses for cannabis farms and grow operations include:
- Farm equipment (tractors, wheelbarrows, etc.)
- Land rental or purchase
- Grow lights
- Irrigation systems
- Security guards
- Security systems with cameras
Even a small retail location or farm can cost $1 million or more to start. Detailed descriptions of how businesses plan to use borrowed money can make lenders more likely to accept applications, especially when the borrowers show that they already have considerable funds to pay for large expenses.
Provide Collateral, If Possible
Lenders want to mitigate risk as much as possible before accepting business loan applications. That fact applies to all businesses, not just those in the cannabis industry. The more collateral a person has, the more likely the lender is to accept the loan application. Having more collateral can also influence the interest rate that a lender charges the borrower.
Collateral can include any asset that the lender can convert to cash when the borrower fails to repay a loan. Lenders tend to favor assets that they can liquefy as quickly and easily as possible. Lenders consider cash the best type of collateral, although the business owner may need to put the cash in a secured bank account to ensure it doesn’t get spent before repaying the loan.
Other acceptable types of business loan collateral include:
- Certificates of deposit (CDs)
- Treasury debts
- Corporate bonds
- Real estate, such as homes or other business properties
- Undeveloped land
Borrowers that plan to purchase land or buildings for their cannabis buildings might be able to use the new assets as collateral. In this situation, the lender would simply take the property when the borrower doesn’t repay the loan.
Cannabis business owners should expect their loans to have liens that make it possible for lenders to sue them for defaulting on loans. The lien can focus on a specific asset or group of assets. Blanket liens can include everything owned by the business.
Get Ready for a Long Process That Could End With a Rejection
Banks are cautious about lending money to new businesses. Most applications get rejected. Cannabis business owners often face additional scrutiny because they work in a “high-risk” industry. Federal laws make it even more difficult for banks to give loans to cannabis businesses. Since the federal government considers all forms of cannabis illegal, many lenders worry that they will get fined or prosecuted for working with companies in the industry.
Cannabis business owners should prepare to answer several rounds of difficult questions before they receive funding. Applicants should know as much about their businesses as possible. It often helps to bring a lawyer, business manager, or consultant to meetings with potential lenders. Failing to answer questions will worry potential lenders, which makes it unlikely for them to release funding to the business.
Business loan applications rarely get accepted quickly. It could take months of collecting documents, revising business plans, and talking to loan reps. Even after months of preparation, the lender could back out at the last moment. Every entrepreneur should expect rejections before finding the right lender for their business.
It’s a long, difficult process. But it’s often the only way to pay the upfront expenses needed to start a cannabis business.
Compare as Many Offers as Possible for Better Terms and Lower Interest Rate
Securing a cannabis business loan takes a lot of time and effort. Business owners shouldn’t take the first offers they receive, though. After weeks or months of searching, any offer may look tempting. It almost always pays to get more offers and compare them.
Interest rates for business loans typically fall between 2.58% and 7.16%. Some lenders charge up to 20% for borrowers in the cannabis industry. Loans typically get repaid within 18 months.
Even a few percentage points can make a big difference in the amount of money borrowers spend repaying their loans.
A business that borrows $1 million with an 18-month term loan and a 5% interest rate will spend about $40,050 in interest. This scenario assumes that the borrower doesn’t pay any origination, documentation, or other fees.
The same loan with a 7% interest rate will cost the borrower about $56,330 in interest. Just two percentage points can save a borrower more than $16,000 over 18 months.
Lenders that charge 20% on 18-month interest rates create a serious burden for cannabis businesses. The interest for that loan comes to about $165,738. That’s more than $13,800 per month in addition to the $1 million that gets repaid over 18 months. Few new businesses earn enough revenue to pay such high rates.
By shopping around for better rates, cannabis entrepreneurs improve their chances of success by lowering the amount of money they spend repaying their loans each month.
The cannabis industry has grown quickly in recent years as more states legalize the plant and its concentrates for medical and recreational uses. Cultivators and dispensaries have opportunities to generate significant wealth, but starting companies requires funding that few people have on hand.
Business lenders can help fill the gap between the cash that business owners have on hand and the amount of money they need to start new cannabis businesses. Anyone interested in beginning a cannabis business should explore their options, find the best possible loans, and use the money to pay for locations, equipment, and inventory that will contribute to success.