Funding the Cannabis Industry
Cannabis remains the most frequently grown, marketed, and consumed semi-illegal substance in the country. As the drive toward legalization increases both domestically and internationally, cannabis draws tremendous interest among consumers, producers, and experts. Cannabis firms, reportedly, received $116.8 billion in working capital as of 2019. We anticipate the value to increase, but financial regulation is still essential to the U.S. sector. Medical and recreational marijuana is legalized in many states across the nation, but it’s still illegal under federal law. Because of this, it’s more difficult for owners of medical marijuana dispensaries to apply for loans, open merchant accounts or obtain other types of financing to cover their expenses or costs to expand.
Since still illegal at the federal level, most banks shy away from cannabis industry businesses. In addition to the difficulties in raising money or getting financing, this implies substantial consequences and inconveniences for cash-operated firms. Due to the 2018 farm bill, hemp plants from which CBD can be extracted became federally legal and opened up the floodgates for the entire CBD and hemp industry.
Cannabidiol or CBD is a chemical compound present in non-psychoactive hemp plants. CBD can help relieve pain, fight anxiety, and depression. It’s also related to supporting people dealing with cancer. Analysts predict that consumer sales of U.S. CBD products are expected to rise from $620 Million in 2018 to as high as $23.7 billion by the year 2023! The CBD industry is a big part of the cannabis industry and is seeing a little more traction when it comes to financing.
Popular Banks are still a No!
You have a lot of options when it comes to financing your legal cannabis business, and as previously stated, popular banks are highly unlikely to help you in financing your business. Many financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) — but since the federal government views, any activity linked to cannabis as illegal conduct, federally regulated banks can not touch any marijuana income. A bank that may work with a company that violates federal law, such as a marijuana dispensary, will not be insured by the FDIC. Even these non-regulated banks do not want to take this risk and opt to avoid working with businesses in the cannabis industry altogether.
Try Your Luck with Local Banks
Even though most of the big-name banks are not available as an option, small but less popular banks may still be an appropriate method of funding or banking. Many of these financial institutions prefer to operate more closely with businesses working in the cannabis sector than the broad regional divisions. However, through the Bank Secrecy Act, all financial firms, such as banks, even the smaller ones, are bound by federal regulation. Under the regulation, banks are required to keep records and may file reports if the daily aggregate exceeds $10,000 and to report suspicious activity that could be correlated with criminal activity. There is no certainty however that every financial company can open an account for you or provide you lending or banking options such as credit cards and loans.
Even at a local bank, there are many legal issues that may arise for a bank taking the risk working with a cannabis business. For example, the bank could be potentially charged with money laundering for accepting such deposits, although the odds are slim, many banks or credit unions simply do not want to take that risk.
Equity financing is in hot demand right now, as cannabis is viewed as a new market. Angel investors are one example of equity financing. Investors can provide capital and all the funding necessary to start a Cannabis or CBD business. Investors who once backed many of the tech firms are now putting their funds into the cannabis industry. Even notable investors like Calvin Broadus, Jr – also known as the hip hop artist Snoop Dogg are getting in on the action. However, in most cases equity financing requires giving up a sizable portion of your equity, which many business owners do not want to do.
Not all investors have been so quick to jump on the cannabis bandwagon. Some don’t want to be involved with anything to do with the sale or production of anything cannabis or CBD related. Whether or not the company actually touches the plant has also been a big decision maker for many investors.
Even with, there are still a number of investment opportunities to all cannabis businesses including the ancillary businesses such as those that provide security or other services for marijuana dispensaries.
Because of these federal rules, debt financing — either by taking out loans, by using lines of credit or other types of financing — can be a little trickier than equity funding but is probably your best bet. The growth of new lenders and finance networks has made it easier for cannabis firms to obtain the financing they need. One of the most common examples of debt financing is an online lender, like Upwise Capital. An online lender is more than welcome to fund a marijuana business. They typically offer short to long term options, along with working capital or business credit lines. Another benefit of working with an online fintech lender is the speed and quick turnaround time.
However, not all online lenders offer funding to cannabis businesses. You will want to find a lender that specializes or is familiar with the cannabis industry. A lender who has access to the correct programs that are specifically designed to work for cannabis, CBD or hemp businesses is what you want to look for.
Cannabis Funding Conclusion
Owning or opening a marijuana businesses comes with many challenges, and it is difficult to find financing within the cannabis industry. The government regulates the bulk of the money flow, leaving business owners with little alternatives other than cash. The positive thing is that many companies and government organizations have the chance to address the demands of cannabis company owners!
Companies like Upwise Capital are on the front line of shaping the products and programs available to the cannabis industry. With a little research, you can find a lender willing to work with you to make your business a success.
Want to get started with a financing for your cannabis business right away?
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**Upwise Capital CEO, Joseph Lustberg will be speaking on the board for the “Brokers, Buds, and Small Business: Funding the Cannabis Industry” panel at the deBanked Broker Fair 2020 Virtual to banking and lending industry professionals.
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