Legal marijuana: where to look for financing
Financing for marijuana businesses
- Conventional loans from federally insured banks are not available to marijuana business.
- The network of high net worth investors and private money lenders offering financing is expanding.
- Would-be marijuana businesses tended to be vetted carefully by lenders and investors.
The legal pot industry has grown exponentially in recent years as more states have passed enabling legislation that allows sales of recreational and medical-use marijuana.
For the growers, the dispensaries and other related pot businesses, there remains a problem. Marijuana is still illegal on the federal level, and that has meant that federally insured banks tend to have nothing to do with the industry.
A growing business
Although a few smaller community-based banks and credit unions now allow pot businesses to open basic accounts, in most cases, it remains a challenge to even get a checking account. Traditional loans are also not an option.
Most marijuana businesses today get their startup funds from wealthy investors that typically want a hefty percentage of the business in return for investing their money into an enterprise. The other option has been hard money loans from private lenders, which tend to carry higher rates.
The good news for startups is that a greater array of investors and lenders have emerged as the legal pot industry has taken hold. Now that California has been added to the mix of states that allow recreational marijuana sales, the number of financiers should only grow.
In Colorado and Washington, the first states to approve recreational use, numerous private lenders are making commercial loans to purchase equipment and real estate. Likewise, the network of high net worth investors ready to jump into the marijuana industry has been expanding.
The short story is that there is money ready to be deployed for cannabis startups. This is not to say that it is easy money to obtain.
Beyond the obvious problem of sometimes having to operate without a bank account, marijuana startups quickly run into other challenges. One common woe is that a typical marijuana business tends to encounter sticker shock at every turn. A legal marijuana business can expect to pay substantially higher costs for leased space, for example, or when buying real estate needed to start the business.
This can make it more challenging for a cannabis startup to secure a commercial loan. In Colorado, for example, some lenders have baulked at what they believe are the grossly inflated real estate prices that cannabis-related businesses are asked to pay for warehouse and industrial space around the Denver area.
Another issue that lenders complain about is a lack of professionalism. As a fledgling industry, there are numerous startups trying to hang a shingle. They may like the idea of getting into the marijuana business, but don’t necessarily have the business acumen to succeed.
Lenders, however, tend to be just as tough on these applicants as they would any other startup. As a rule, commercial loans are hard to obtain. Lenders tend to evaluate carefully the creditworthiness of the applicant and their partners, and the company’s business plan.