Right now cannabis is booming. It is as good a time as any to get a piece of this 61 billion dollar industry. With public approval and legal support for cannabis at an all-time high, that number is only going to increase. Some think it could hit 130 billion by 2024. Despite all this revenue, many entrepreneurs may still be hesitant to hop on because financing for cannabis is so difficult to acquire. Here are the ten main roadblocks that cannabis businesses face for funding and how to get around them.
1. Federal Illegality
The first and most apparent cannabis financing roadblock revolves around the fact that cannabis is still considered illegal by the federal government. But since states make their own laws, marijuana legalization relies on state-by-state legislation. While you might not have an issue opening up a cannabis operation in a state where it is legal, you will hit a wall when it comes to cannabis financing. The federal government funds traditional lenders such as banks and credit unions; thus, they must adhere to strict guidelines regarding national policy.
2. Banks are hesitant to work with Cannabis ventures
Until recently, banks were entirely unable to loan capital to any marijuana-related business. In the eyes of the federally backed party, a company of this sort was considered illegitimate. But in 2019, this changed with the passing of the SAFE Banking Act. The government acknowledged the legitimacy of the cannabis industry, and so this bill released lenders from their previous restrictions. The SAFE Act protects financial institutions from facing any legal ramifications for working with a marijuana-related business.
Despite the “green light” to process funds, the vast majority of banks are still unwilling to work with a cannabis-related business. Banks are not interested in undergoing any enterprise that could be considered risky. As the operation relies upon a single bill, lending to a cannabusiness does indeed contain a good deal of risk.
3. Credit Card Transactions
The federal status of marijuana presents another problematic cannabis financing roadblock. As far as transactions go, cash is virtually the only option. When you walk into a recreational or medical marijuana store, you must pay cash. This can lead to a complex problem for any business owner as it becomes much more challenging to keep track of all your sales and transactions.
You must allocate additional time and resources to track and organize all of these sales for tax purposes. On top of that, any business that operates solely on cash has a much more difficult time proving its legitimacy.
A standard loan option for smaller businesses that run daily transactions is a merchant cash advance. With a merchant cash advance, you can offer up a percentage of daily or monthly credit card sales to receive a lump sum. Unfortunately, this will not be an option as these loans are only available for parties who deal in credit card transactions.
An alternative option is a business cash advance. A business cash advance works similarly to a merchant advance, but instead of agreeing to put up credit card sales, you put up general sales. Be aware that it will be a bit more challenging to qualify and will require an extensive report of consistent revenue.
The loan determination will hinge entirely upon sales revenue, so this is an excellent option if you have a poor credit history.
4. Storing your money
As aforementioned, banks are quite reluctant to work with any cannabis-related business. But this goes beyond cannabis financing. Banks will also be very unlikely to allow you to store your companies funds in a bank account. Officially, banks can legally enable you to house your marijuana business funds due to the SAFE banking act. Up until that bill was passed, it would have been considered money laundering. Unfortunately, this doesn’t change the fact that most banks are still very unwilling to do so.
Marijuana business owners are turned away time and time again by banks and are subsequently left with very few options to store their cash revenue.
Technology is evolving rapidly, and the growth of the internet does provide some alternative options. Many cannabis business owners are turning to cryptocurrency. Cryptocurrency is a digital currency secured by a system called cryptography, making it impossible to counterfeit. Cryptocurrency is a decentralized network meaning there is no governmental oversight or regulation regarding their use and transaction. The most popular cryptocurrency is currently Bitcoin. But the cannabis industry has spurred the growth of two very popular cryptos called PotCoin and CannabisCoin.
5. Security Costs
Since transactions must be conducted almost entirely with cash, operating a marijuana business can paint a target on your back. With many physical assets stored within the property, you must allocate funds to purchase armed security. But paying for protection goes beyond preventive measures. State laws require that medicinal and recreational stores provide a certain level of minimum security. These security minimums vary by state, so it’s essential to research your specific state requirements.
6. Time Frame
When lenders give out loans, they look for a high degree of stability. One of the main stipulations is that the business receiving the loan must have been operating for a good deal of time before the loan app. Lenders do this to reduce risk. By and large, businesses that have existed for a long time are much more likely to continue operating for the foreseeable future. Lending to a new business or startup is a gamble. Despite projections and a solid model, it’s tough to prove profitability without hard data to back it up.
If you are a company in the marijuana industry, this is another cannabis financing roadblock you’ll run into. The legality of marijuana is still in its infancy. The first states to legalize marijuana for recreational use were Washington and Colorado back in 2012, but in some states, marijuana has only been legal for a handful of years. In this case, it would be virtually impossible to supply the extensive business history required to obtain a traditional loan.
Traditional lenders are not the only sources from which you can procure a small business loan. Alternative lenders are an excellent option for any cannabis business as they don’t need to adhere to the same strict regulations as banks. Additionally, alt-lenders are much more comfortable taking on risky clients.
Amerishop Financial is the top of the line when it comes to connecting small business owners with lenders. We would love to help you get a short-term business loan for your cannabis operation.
7. Inconsistent Costs
Inconsistent costs are going to be another significant cannabis financing roadblock. In an ever-changing industry where nothing is certain, charges will come out of nowhere, and you need to prepare for that.
An additional influx of revenue spurred by a rush of post-covid tourism could suddenly leave you with a lot of cash that you need to transport before it gets out of hand. You would need funds to pay a transport company.
Or perhaps a new governmental regulation created a tax spike, and you suddenly owe money not covered by your working capital.
In cases such as these, a business line of credit would be advantageous. A line of credit is an open-ended business loan that you can tap to provide the funds for immediate costs. Unlike a lump sum, the credit takes the form of “use as needed.” Therefore you have the spending power in your back pocket if costs present themselves, but you aren’t penalized for funds you don’t use.
Amerishop Financial can connect you with a line of credit at a competitive APR. Just make sure that your credit score is in order and that you can prove at least 100K in annual revenue.
8. Expensive Equipment
The sale of marijuana relies upon large-scale growing operations. These operations are capable of producing massive quantities of top-of-the-line cannabis. Cannabis quality is highly competitive, and growers iterate yields by altering water, ph levels, soil, and lighting, all in the pursuit of cultivating the highest level product possible. Growers attend conventions like the cannabis cup to market their products, and the attendees vote on which strains are best.
To be relevant, cannabis retailers must ensure that the product they sell is top tier. You can do this by purchasing your supply from reputable growers, and many pot shops take it upon themselves to grow their product. This is a great way to cut out the middleman and guarantee a premium grade. But the cost is one major issue associated with this route.
Running a large-scale grow operation is a costly endeavor. It requires a ton of equipment, especially if the operation is indoors. Growing cannabis indoors is becoming an increasingly popular choice as the variables such as lighting, temperature, and moisture can be precisely controlled.
Equipment financing is a great option to meet these costs. A lender will front you the total cost of any cannabis equipment such as lights, tents, or exhaust fans. Bitx is the online marketplace for business equipment financing. We can get you the money to fund 100% of your equipment costs in as little as two days. Just make sure that you have a minimum 630 credit score and annual revenue above 100K
9. SBA
The SBA stands for the Small Business Administration. They work with various lenders to provide small businesses with government-backed loans. The SBA is an excellent resource for small businesses in need of funding, but unfortunately, they cannot assist any business related to the sale of cannabis. This is just one more unfortunate cannabis financing roadblock that a cannabis business owner must circumvent
10. Stigma
Now, this cannabis financing roadblock is the most prevalent. The biggest issue you must face as a cannabis business owner is the stigmatization of your product. Cannabis public favor is at an all-time high; despite this, it remains illegal on a federal level. The 1930’s film Reefer madness and the 1950s war on drugs have contributed to the stigmatization of cannabis.
But numbers don’t lie. The birth of the marijuana industry has created a rapidly growing opportunity dubbed “The Green Rush.” The name stems from the growth rate of the cannabis industry mirroring that of the 1800’s Gold Rush. Many investors are racing to put money into marijuana stocks like Sundial Growers, which are pretty much guaranteed to appreciate over the coming years.
The cannabis industry is on track to clear 100 billion soon. You don’t need to wait for federal laws to catch up with the trend. Whether you’ve been in the business of cannabis for years, or you are looking to start a brand new venture, it has never been a better time to enter this rapidly evolving market.
After all, Amerishop Financial is the premier resource for small business loans. We will help connect you with the loan that is best suited for your cannabis financing needs.