How to Find Funding in the Cannabis Industry
So you want to start a weed business? Well, there is a lot you should know.
As of June 2019, there are only about a dozen remaining states that have marijuana listed as completely illegal with varying degrees of decriminalization. With the legalization of medical and recreational cannabis and CBD products on the rise throughout the country, now is a prime time for entrepreneurs to get ahead of the market with their cannabusinesses. Except for one setback: the struggle of trying to find funding in the cannabis industry.
Finding funding to grow a weed biz is and will continue to be extremely challenging as long as marijuana is illegal on the federal level.
Before discussing what you can do to find funding in the cannabis industry, you first need to know what you can’t do.
Marijuana is still a Schedule I drug on the federal level, meaning major banks, which are regulated by the federal government and FDIC-insured, cannot get involved with this illegal drug money. The legalization of marijuana varies state by state, so while some small local and state-chartered banks might be able to provide a loan, it still comes with a risk. If the federal government chose to intervene with legalized state rulings, the feds could potentially shut down the cannabusiness at any time. This means any lender with debts being collected from a company recently shutdown by the government would not be paid back, not to mention the bank itself would be in trouble since transactions related to cannabis are considered criminal activity.
Banks also refuse to issue credit cards or even open a checking account for a cannabis business for the same liability reasons. Federally chartered banks can’t touch any weed money and if they do it is at their own risk. The Bank Secrecy Act requires all banks, including the community credit unions and state-chartered ones, to flag any transactions of $5,000 or more that may be associated with illegal activity, including federally illegal cannabis transactions.
The risk to banks has created one of the most difficult obstacles to overcome when trying to find funding in the cannabis industry.
All banks take a risk when handling marijuana money, not just the major federal ones. Thankfully, banks aren’t the only institutions with money to lend.
Banks loans may be the most common business funding source, but they aren’t the only option. Funding for businesses in the cannabis industry comes down to two categories: equity funding and debt funding. The best option for your business depends on what you envision for your company’s future, what assets you already have and how much ownership you want to maintain.
Utilizing venture capital requires exchanging equity, or ownership stakes, of your business for money. Weed based businesses with big dreams and anticipation of scaling might find this the best option. Popular venture capital firms that fund cannabis businesses are: Canna Angels, Casa Verde Capital, Green Acre Capital, Poseidon Asset Management and dozens more. A more comprehensive list can be found here.
Instead of working with a larger firm, you can also look into finding an angel investor, one person with money to provide your business with extra working capital. This method is preferred by those looking for mentorship in addition to money, as working one-on-one can provide guidance while navigating through the early stages of business startup and growth. AngelList has a list of angel investors that will fund cannabis businesses, but keep in mind they probably get contacted quite a bit. If you’re lucky, you might get the attention of a musician, athlete or other celebrity.
Traditional banks are prohibited from working with pot money, but there are still funders and lenders that have the ability to provide large amounts of money to these “legally gray” cannabis businesses. Online lending is done with private investor money and may or may not require collateral. Online lenders known to work with cannabis businesses include: Kabbage, GoKapital, United Capital Source, and others, it just might take some searching to find the right match.
Crowdfunding a cannabis business can be done in two ways. You can ask your family and friends to lend or give you money to bring your beloved green to the community, fingers crossed your rich aunt is feeling generous. Or you can post your business plan on a crowdfunding website to acquire funds from strangers. Kickstarter and Indiegogo are the best-known platforms, but posting your company may require approval as the state-by-state laws vary and can cause questionability. StartEngine is reported to approve weed-based startups, or you can find a dope-specific platform such as CannaFundr or Fundana. The debt part of crowdfunding comes from the promise you make to those who contribute money: free t-shirt, free product, or other incentives.
What You’ll Need
Traditionally, bank loans require a strong credit score of 700 or higher. However, without the ability to get a credit card, your business won’t have a credit score. Cannabis is currently a cash-only business and while you can exchange quite a few greenbacks for your green, credit card companies, which are run by federally regulated banks, will not accept cannabis money. Using a personal credit card for these transactions is just as illegal and could have repercussions.
Here’s how you can manage cash flow and get the credentials you need to show investors and lenders your startup or established but growing business is worth giving money to.
Get A Cannabis POS System
A new industry is emerging from the underserved cannabusiness market. B2B companies that help marijuana companies run and operate are becoming more common as solutions are needed for businesses in legalized states.
As a dispensary, a point of sale system can help you manage and accept payments, and when you choose a green specific software, you can get a service that knows the legalities of the industry, helping you stay compliant with the law. Green Bits will auto-apply transaction limits per the state laws, capture customer information, create promotions and loyalty programs, generate inventory audits and produce state reports.
If you’re a grower, kitchen or distributor, LeafLogix can help with daily cash flow monitoring. This software services the entire supply chain of cannabis from seed to sale. It’s beneficial when running a business to have the ability to not only track operations, but also generate reports that influence future decisions.
If cash-only becomes an issue for making sales, CanPay is an option. CanPay is a debit based payment app not associated with FDIC-insured banks, which comes at its own risk but can offer convenience to retailers handling large amounts of cash and customers who don’t carry cash.
Understand Cash Flow And ROI
You’ll want to have a software like one of the ones mentioned above because potential investors will need to see your business is healthy and financially a low risk. The next question investors will ask is what you would use the money for and how you would get a greater return on it. Your return on investment needs to be enough to cover the initial investment plus interest. For example, more real estate would allow a greater volume of plant growth that would increase sales and attract bigger processors.
Seek Funds When Strong Not Struggling
A common mistake business owners make in any industry is applying for a loan when the business is struggling. This ends up costing more as underwriters see a risk and will approve a loan with higher rates and terms. Applying for a loan when strong and boasting solid monthly sales will save money in the long term, and it doesn’t hurt to have a cash flow credit available for when opportunity or emergency arises. Some cannabis-friendly online lenders provide revolving lines of credit which may be suitable for your company.
Industry by Industry, State by State
While we wait for the federal government to give marijuana the green light, each industry needs to be aware of the ever-changing state-specific laws and regulations. December 2018 saw the signing of the 2018 Farm Bill which decreed hemp is no longer a Schedule I controlled substance but is still under the regulation of the FDA. Hemp and CBD businesses can access business capital through banks and other federally involved establishments, and interstate commerce of these products can legally occur (As long as the THC concentration of a product is no more than 0.3%).
When evaluating each specialty, grow houses, farms, distributors, processors, and retailers all must look into their individual regulations and loopholes per state. There may be a state-specific financing option available, you just have to get creative.
Politicians are noticing the “The Green Boom,” or more accurately, are noticing the money to be made off of taxing marijuana purchases. Even Nebraska is tempted by farming hemp research crops. The states that have embraced medicinal and recreational cannabis sales early on are encouraging business growth, but a handful of online lenders, VC firms, angel investors and generous friends aren’t nearly enough to meet the demands of business owners trying to find funding in the cannabis industry.
While a newly legalized state is an open market for new marijuana businesses, the uncharted territory comes with its own set of challenges. Thankfully, bold entrepreneurs are paving the way for future cannabis business funding opportunities.