How Do You Get a Cannabis Business Loan?
Investors, crowdfunding, and friends and family are options on the table.
With the wide acceptance of cannabis in the country, starting a cannabis business doesn't seem like such a bad idea. It's a brilliant idea that entrepreneurs would like to enter into a relatively new industry in a bid to carve a niche for themselves as soon as possible.
Unfortunately, not every one of these intending cannabis entrepreneurs have the required capital to start, and thanks to the federal regulations on the drug, a lot are not informed on the available cannabis business loans being offered around the country. While it may be difficult to obtain one from a conventional financial institution, there are ready investors, venture capital firms, and crowdfunding ventures willing to provide that much-needed capital.
If you find yourself in this group, or you have someone that belongs here, read on for a comprehensive guide to obtain a loan for your cannabis business.
The cannabis industry in the U.S.
Running a cannabis business is no easy feat, the value chain is quite broad. This is what makes it capital intensive, most especially if you want your business to stand out.
Cannabis is still classified as a schedule 1 drug, hence it is banned at the federal level. The laid down regulations have also made it difficult for financial institutions to give out loans to cannabis entrepreneurs.
Regardless of this, several cannabis stores are being established, and the demand for more cultivators, manufacturers, and processing establishments keeps growing each day.
Recent indications show that the federal government is leaning towards enacting a federal cannabis legalization bill, but this might take at least a year or two to move forward. As this legalization processes start, banks will begin to loosen up enough to provide significant funding and ancillary services for cannabis entrepreneurs, without the fear of federal prosecution.
For now, it remains illegal, hence this article will explore other alternative options to sourcing for cannabis business capital.
Sources for cannabis business loans
For now, going to a bank for a cannabis business loan might be a waste of time. It is advisable for entrepreneurs to network and finds willing lenders through other routes.
The cannabis industry is a fast-growing industry with billions of dollars to be made. There are several individuals or groups eager to pump a lot of money into the business. You only have to position yourself and your business in the right place.
These investors could come as venture capitalists, these are extremely wealthy investors willing to provide the funds for a relatively new or small business to grow. Venture capitalists provide the capital in exchange for equity.
These investors could also be angel investors. Angel investors have a lesser amount of funds to invest, unlike venture capitalists. They also stick around to help businesses get started, they are more like silent partners in the business.
To find interested investors, you can go through cannabis business directories. There are also social media platforms with large groups filled with potential investors for cannabis businesses. These groups are common on LinkedIn and Facebook.
Another option is by attending cannabis-related events where you can meet and network with investors. This way you meet potential investors face-to-face, preferably with an already prepared business plan as well as a great pitch.
Venture capital firms and angel investors are extremely helpful for cannabis startups looking for funding.
Today, this is one of the most innovative ways to fund a new business nowadays. This involves engaging a diverse population for small investments that do not have to be paid back. It's not so complex, a wide range of individuals gives you a small amount of money, you do not give away equity in return, nor are you required to return the invested funds. However, it won't hurt to offer free products, merchandise, or other special services to draw more people to your business.
There are crowdfunding sites dedicated to the cannabis industry, the best two being CannaFund and Fundanna. These sites bring together like minds in the cannabis and hemp industry and help new cannabis entrepreneurs start campaigns and get the necessary funding.
Luckily for cannabis entrepreneurs, the US Securities and
Exchange permits any US citizen to invest up to $2,200 in startups for a stake in the business. Companies have raised over a million dollars by offering their stocks in return for capital investments.
If you have a solid credit history, you can indirectly get a loan for your business by submitting a bid for a personal loan. Before you do this, make sure your lender knows what you plan to use the funds for, to prevent problems in the future.
Family and friends
You can solicit capital from your family members, as well as your circle of friends. The services of a law firm must be procured to work out the kinks and provide a legally binding contract. This way everyone can be held accountable.
Equity can be offered in two ways for the cannabis business. Private equity funding and home equity loans. Private equity firms offer short-term, high-interest loans, they sometimes provide capital to get an enormous stake in the startup. Home equity firms provide yin with a line of credit with the same value as your home.
Safe Banking Act
These issues might be a thing of the past if the SAFE Banking Act of 2021 is passed as soon as possible. This would permit traditional banks to provide financial services to businesses in the cannabis sector. Meaning the banks would have no risk of being penalized for associating with the cannabis business.
Final thoughts: There's always CBD
Remember to get your facts right and business plans in order before approaching any of these loan providers for financing. Most importantly, take note of the cannabis legalization laws in the state and have an estimate of the total funds required for your startup.
If you've tried all the above steps without getting a loan, you can consider switching your business to a CBD-related business. CBD businesses are technically legal and they are accepted by more investors compared to solely cannabis businesses.