Alternative Business Funding for Cannabis Businesses

As an owner or prospective owner of a legal cannabis business knows, finding the initial capital and maintaining funds for a cannabis business is a difficult process. Many banks flat out refuse to provide loans for completely legitimate cannabis businesses, and banks may close the accounts of those running the businesses as well. However, there are alternative business funding options for opening cannabis businesses, cannabis start-up loans,  as well as funding existing businesses from cannabis lenders.

Why Banking is A Difficult Option

National banks are still subject to federal law if audited by the IRS or investigated by federal sources. While 33 states and DC have legalized medical marijuana, and 11 states have legalized recreational marijuana, it remains a federal crime to possess or use the substance. This means that federal banks are reluctant to finance cannabis businesses, including hemp and CBD businesses, for fear of federal repercussions.

What does this mean for cannabis owners? Typically denied loans, closed bank accounts, and even the loss of the ability to use major credit companies’ gift cards. Some banks are coming around, but many banks are still reluctant to invest in businesses whose primary product is a controlled substance, which is difficult to impossible to liquidate if a borrower defaults on a loan. The process of banks warming up to financing cannabis businesses is slow and legislation is proceeding just as slowly. For now, many cannabis businesses need to pursue different financing options.

Stream Financing

Stream financing is becoming increasingly popular in the resources industry as operations like mining become a higher risk and are less likely to receive traditional financing. Stream financing is most popular for mining operations but has moved to the cannabis industry as businesses search for alternative business funding. This type of financing provides the upfront capital needed by many businesses to get started, and under the traditional model can even provide an ongoing source of guaranteed income.

To use the mining industry as an example, when a mining operation makes a stream financing agreement, they are given a certain amount of upfront payment by a stream financing company in return for an agreed-upon portion of the mined resources being sold directly to the financing company at a reduced price. The capital does not need to be paid back until production and sales have begun, giving businesses an opportunity to get on their feet before payments need to be made.

Cannabis business owners may find the model to be a bit different, as streaming companies are less likely to want the rights to buy a controlled substance. However, they still provide third-party capital and allow cannabis businesses to pay back the loan after sales have begun. Going to a third-party lending company rather than a bank is typically easier for cannabis businesses, as these companies are more understanding when it comes to the subject of the business.

Royalty Agreements

The use of royalty agreements can be complicated, but it’s a good option for cannabis businesses looking for upfront capital from an independent financier. This type of royalty agreement is different from licensing a product to others for the original business to collect royalties, although if you can acquire a state trademark this can be a lucrative source of income if done properly. It’s important to understand the state laws when setting up a royalty agreement, as certain types of agreements can conflict with certain clauses.

Under a royalty agreement, a financing company or financier agrees to provide upfront capital to a business in order for them to purchase assets such as land, equipment, and infrastructure. In return, they take a portion of the gross or net profits of each sale of that company’s products in order to pay back the loan. This is, of course, dependent on both parties’ confidence that the product will sell successfully and continuously.

For cannabis business owners just getting started, this can be a valuable source of capital, as repayment isn’t required until sales begin. This allows a business time to get the product and branding established and pay back the loan when they begin to have the cash flow to support the business and themselves, rather than paying back a loan while they are still in the stages of growing the product and establishing the business.

Crowdfunding

Many businesses even outside of the cannabis industry use crowdfunding to support large projects or the startup process, garnering community financial support in return for promises of investment or rewards such as exclusive services and products. This can be a good source of capital because individuals are frequently more willing to support a cannabis business than institutions. However, it’s important to have proof of concept and financial figures on hand to reassure investors that they will get their money’s worth from their investment.

Crowdfunding can be done through specific websites, although major crowdfunding websites may remove campaigns for cannabis businesses for the same reason that banks will deny loans and close accounts. It's best to look for reputable cannabis-specific crowdfunding websites that are guaranteed to allow the campaign on their website. Unfortunately, when it comes to crowdfunding, raising a large amount of capital can be difficult without the help of venture capitalists or angel investors.

Cannabis businesses may want to consider crowdfunding for only part of their capital, as it may be difficult to raise the whole capital just through one source. Diversifying overall is a good idea, as one source may not be able or willing to provide the whole capital for starting this type of business. When crowdfunding, it’s important to reach out to the local and online community to seek out willing investors, as many people contributing small amounts can go a long way.

Alternative Payment Sources

For existing businesses, digital banking and cash flow is a difficult process. Many cannabis businesses are forced to be cash-only, even paying employees, services, and taxes in cash. This can lead to problems for all parties involved, as cash-only transactions are becoming less popular and less viable in today’s all-digital world. Some businesses have attempted workarounds to this but maintaining bank accounts and allowing digital transactions are still difficult.

A few types of alternative payment and banking options exist, though some are less sustainable than others. Some businesses are using cashless ATMs to dispense vouchers for the store, which limits the exposure of those transactions to actual cannabis sales. Others allow the customers to purchase gift cards and then pay for the cannabis products with the gift card, although companies like Visa and Mastercard are cracking down on this practice. For banking, some businesses use omnibus accounts, which comingle assets from multiple businesses, to lower the profile of their cannabis business.

All of these practices can be risky, although perhaps no riskier than running a cash-only business or dealing with banks that may close an account with little to no notice. Until the SAFE Banking Act passes, which will protect banks from federal repercussions if they choose to invest in cannabis businesses, businesses will have to decide which of these types of practices are best for their business in order to deal with the unwillingness of banks to sustain cannabis businesses.

At South Florida Funding Group: WE FUND THE IMPOSSIBLE, EVEN CANNABIS!

Conclusion

Although they can be difficult to find, alternative business financing options do exist for cannabis businesses. Owners should look primarily for reputable third-party lending companies, not banks, that will provide the capital they need on a payment plan that is reasonable. For cannabis business owners, the financing market is difficult, but with any luck, it will become much less difficult soon.

Read more about Cannabis, Hemp and CBD Business loans – CLICK HERE