Marijuana Financing: How Do Cannabis Business Loans Work? SHARE Share on facebook Share on twitter Share on linkedin Financing a marijuana business can be more
Cannabis Equipment Financing: Options to Grow Your Business Today
In an ever Cannabis growing industry, the easement of U.S. Laws and gives the ability for exponential growth as more states are likely to legalize marijuana. Still, there are plenty of restrictions, specifically in terms of financing. The Cannabis, Hemp & CBD industry faces obstacles from federal regulations that in turn makes obtaining financing from the traditional FDIC insured banks almost impossible. With traditional loans having restrictions from the federal government, cannabis businesses are forced to turn to alternative lenders like Upwise Capital, private specialty lenders, credit unions in their state, and/or equity investors and venture capital investors.
These private and institutional lenders are now providing debt options to MRB’s (Marijuana Related Businesses) to try and capitalize on the Cannabis industries growth. Many cannabis businesses concentrate on farming, laboratory research, extraction of THC or CBD for edibles or products and dispensing among other sectors. There are so many different industries within the Cannabis, CBD, and Hemp industry. Regardless of which market niche is your focus, the right loan for your business can boost your productivity and sales drastically.
What Cannabis Equipment Can I Finance?
Equipment financing plays a huge role for a Cannabis business to operate and grow. Equipment that can be financed for MRB’s may include but is not limited to cultivating equipment, harvesting equipment, processing equipment, retail fixtures, greenhouses, other supplies, business systems, trucks, etc. When looking for equipment to purchase for your business consider if new or used equipment is better for your specific needs. You will need to figure out, the type of equipment you are looking for and where you can purchase that equipment. Getting an invoice or quote on the specific equipment is usually needed.
Many companies specialize in selling used cannabis grow equipment and greenhouses at a discount. A lot of MRB’s are cash heavy, but just because you have the cash to buy something outright does not mean you should. That money may be better spent elsewhere depending on your business goals and return on investment. Equipment leasing programs and term loans allow you to pay off equipment over 2- 8 years on a monthly payment structure at a low interest rate. There are a few options to consider once you have made the wise decision for your business.
Equipment Financing Options in 2020
What should be determined next is the best route for receiving the equipment. Cannabis businesses can use working capital, bridge loans, or a merchant cash advance to outright buy the equipment or go the route of leasing or financing the equipment from an equipment financing lender. This can be determined by how you are using the equipment. Is it something that needs to be replaced after one year? Or, is it something that can be used year after year? What is the value of the equipment year after year? Determining the depreciation of your equipment and your ROI will help to evaluate the best financing product for your business. MRB’s can also leverage other assets such as commercial real estate, crop, licenses, and accounts receivables to secure financing to purchase equipment. Sale lease backs are a common option used by cultivation facilities, grow operators, and cannabis companies. A “sale/leaseback” or “sale and leaseback” is a transaction used in the marijuana industry in which the operator sells an asset, typically real estate, or equipment, and then leases it back from the buyer. This specific type of transaction functions as a loan, with payments taking the form of rent. Also, refinancing existing equipment can give a cannabis business owner access to the cash needed when ever they need it, since it is difficult for an MRB to secure a line of credit. No matter how you chose to finance the equipment needed to help grow your business, make sure you consider all options. Upwise Capital’s knowledgeable representatives can help you to navigate the different equipment financing products available to cannabis businesses, even if you are a start-up business or new operation.
What are the rates for Cannabis Equipment Financing?
In this section we will break down the cost of capital for cannabis equipment financing. We now know we cannot go to traditional banks and the SBA programs will not qualify MRB’s. Any cannabis company that touches the plant cannot get traditional bank financing, but ancillary business, CBD only, and Hemp only companies have more options for financing. As mentioned earlier, private lenders or venture capital investors are the best way to go as the cannabis industry is typically restricted. What are their rates and terms going to look like for equipment financing?
Typically, rates range from 8-25%, determined by the borrower’s credit score, business credit history, and other risk factors. Given that the cannabis industry is considered a higher risk industry, the rates can be more expensive than conventional equipment financing loans. For example, traditional equipment financing leases typically come in between 4% to 14% depending on the beacon score. Most equipment financing lenders will offer leases between 2- 5 years, but Upwise Capital’s equipment financing lenders go up to 8 years. The term of the equipment financing loan can range anywhere from 2- 8 years and is determined by several factors, such as the equipment’s lifespan. How long the equipment is expected to last, and its depreciation value is something an underwriter will always evaluate when calculating the terms. If a longer term is needed, refinancing or a sale – lease back is always a good option.
Out of the Box Equipment Financing Options
Sale-Lease Backs – For MRB’s in a typical sale-leaseback deal, the tenant sells the building to a real estate investment group and then agrees to lease back the building under a long-term agreement, usually 10 to 15 years. Some private sale lease back agreements will also ask for a equity kicker upon maturity.
Greenhouse Financing – Upwise Capital offers a unique greenhouse financing product for new build cannabis operators looking to buy land, start a new grow operation, or leverage their existing cultivation facility. Providing 100% financing for the greenhouse, the construction, and the land along with 90% financing of the FF&E on an agreed upon budget and construction plan over a 3-year term and flexibly payment structure through a private lending partner.
Upwise Final Word: Cannabis Equipment Financing
The cannabis industry may be an emerging market with unlimited growth potential creating millions of jobs and tax dollars, but the traditional financial industry has not fully embraced pot companies. As more and more states accept pot use for medical and recreational use, maybe the traditional banks and SBA will change their stance of funding this cash cow.
Currently, many profitable MRB’s that should be qualified for low rates over long terms will have to pay for it. The cost of capital for cannabis companies is inherently more expensive strictly due to the federal regulation and bad name that cannabis companies have. Most banks consider the cannabis industry to be restricted, so make you do your research when considering a lender. Look for companies with experience in funding the cannabis industry and experience with cannabis equipment financing such as Upwise. Using an equipment financing product through Upwise Capital to finance your equipment can help to free up cash flow for other business operations and opportunities. The ability to maneuver and shop around for multiple offers with one company is something you may want to consider when applying. Before you apply, do your research, and ask questions to determine the best lender to fit for your specific needs.
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