Legal marijuana sales are booming across the U.S., so many people are wondering what it takes to break into the cannabis industry. If you’re not one of the few lucky folks who can finance their own cannabis company, you’d need to seek out funding. SBA and other government loans are not available for this industry, which leaves a few different options for folks looking for financing. Here are a few basics to give anyone interested in this industry a starting point.
Alternative loans from institutions that aren’t banks can be a good place to start. Dynamic Alternative Finance, a Dever-based firm, connects marijuana entrepreneurs with investors. Over the last two years, the firm has helped finance $27 million in loans and leases for cannabis businesses. Firms like these are present in states with recreational or medicinal marijuana. Other than taking out a home equity line of credit, using credit cards or raising money via friends and family, financing firms like Dynamic Alternative seem to be the most common way to get financing.
However, all lenders work off debt or equity based financing. Debt lending is based on credit score, character, capacity to repay, cash flow and collateral. Those who decide on this route need to know how much is needed and how it will be spent. Plus, they need to provide organized financial information that includes a balance sheet, evaluation of assets and credit score. Equity investors will be more interested in full pitch of the product, market, competition and more. This type of funding is provided based on expansion projections. Often, equity investors requite a bigger return than a debt lender.
There are some venture capitalists that are offering equity investment into businesses entering or expanding into the cannabis industry. If you’re looking to get VC funding, be sure to maintain a good credit score and keep impeccable financial records. When you start discussing projected profits, you’d better have the financial records to back them up. Savvy investors are diligent when it comes to their investments, so if you’re fudging any numbers, they’re going to figure it out.
As the years progress, so does cannabis policy. There are likely to be more ways for folks to finance legal marijuana businesses as the industry develops and becomes more widely accepted across the U.S. Until then, investors are looking for products in the industry that can offer higher yields and returns.