A Brief Guide To Financing Your Cannabis Enterprise

by | Nov 22, 2022 | Articles

Your dream is to open your own cannabis business and you have considered all angles to get the business off the ground. Your checklist includes a SWOT analysis, a well-thought-out business plan, scouting a few promising real estate locations, and designing a company logo and website prototype. What’s next? Unless you can self-finance your business, you must seek investors or secure capital from lenders to fund your vision, or watch it go up in smoke.

There is no one perfect answer to the financing mix but considering the average cannabis business requires between $250,000 and $2 million in start-up costs, it becomes clear that access to adequate capital and continuous financing is necessary. The cannabis business is an emerging, high-risk enterprise and until cannabis is federally legal, conventional lending institutions are unlikely to fund the industry.

Below are available options to consider financing your cannabis business, examining debt, equity, and mezzanine financing.

Debt Financing

Private Banks and Credit Unions

Several private banks and credit unions are offering cannabis businesses, products, and services to help the industry grow. This service may come with a premium, as banks can choose to upcharge their cannabis clients with added fees for increased regulatory reporting requirements. Illinois’ Credit Union 1 is partnered with the state’s Department of Commerce who has established a $30+ million cannabis business fund: the Cannabis Social Equity Loan Program. This program offers low interest loans and banking services to cannabis businesses in the state. Other states are following suit, looking to attract the cannabis industry to expand in their state, and welcome the increased tax revenue.

Private Lending Institutions

Private firms and alternative lending platforms offer financing that can help a cannabis start-up, small business or developed operation launch, or expand. Accredited groups, high-net worth individuals or families fund private lending institutions. Loans are often short-term, fixed-rate and can offer flexible terms that may result in an easier and faster loan-approval process. Streit Lending is a Los Angeles-based, family-owned lender that originates bridge and construction loans for commercial real estate investors within the State of California. They are specialists in the cannabis industry and have helped owners and operators finance their commercial real estate needs. Auriel Streit, Managing Director, acknowledges, “There are challenges facing cannabis owners and complexities relating to cannabis transactions that we are prepared to manage. We can navigate the intricacies of the law, proper licensing, environmental issues, and more, and provide personalized service with quick and efficient closings.”

Credit Cards, and Friends and Family

Depending on a business owner’s personal credit score and established credit limits, credit cards may be the entrepreneur’s best friend, and easiest start-up option to fast cash. However, this type of debt is expensive and those using this option should be aware of high interest rates and the risk of over extension. Friends and family can offer flexible loan terms and provide early-stage startup funding. Tapping into your personal network is often the best way to raise that first round of initial capital to launch the business.

Equity Financing

Private Equity

Angel investors or venture capital and private equity funds may offer funding in exchange for a portion of ownership. In this arrangement, you don’t have to pay the money back, however the investor now owns a percentage of private stock, and a piece of your business. The disadvantage is a possible loss of controlling interest in your own enterprise. The advantage is that this is a timeworn strategy to raise capital needed to grow your business.

Mezzanine Financing

Combining elements of both debt and equity financing, the lender has the option to convert unpaid debt into an ownership interest in the company. Mezzanine financing is less expensive than equity financing and offers more flexible terms and covenants than debt financing. A loan covenant is an agreement that spells out the terms and conditions of the loan policies. The covenant requires or restricts certain circumstances or behaviors of a borrower. While change may be on the horizon with the Senate’s introduction this past July of the Cannabis Administration and Opportunity Act, there still remains a journey to decriminalize weed on the federal level. Fortunately, there are viable options for cannabis entrepreneurs to gain access to capital through alternative resources and evolving creative financing strategies to support the industry.

About Streit Lending

Streit Lending offers short-term construction and bridge loans in Southern California, from $500,000 to $10,000,000 at a loan-to-cost up to 70 percent, to build and rehabilitate commercial and residential properties. Streit can tailor a loan to meet borrowers’ needs and offers quick, transparent, and stress-free closings that help clients complete real estate transactions faster.

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