Entrepreneurs Finding New Funding Options
How do legal-marijuana business entrepreneurs raise money to start or expand their business? The big banks won’t open a checking account for them, let alone lend them money, because cannabis production, processing and selling is still illegal at the federal level. Banking and financing options are limited, but there is a need and funding can be found.
A plethora of reasons could spark the need for an influx of capital. Peter Barsoom of the edibles-maker 1906 said distribution of his products expanded rapidly in Colorado, and are now stocked in 100 dispensaries. That success comes with new expenses to service the additional accounts and manage inventory. The company has also been creating new products including two types of chocolate covered cannabis coffee beans, and is working on swallow-able tablets for those who want a zero-calorie option. Besides research and development costs, each product needs packaging designed, production lines set up and marketing communications created.
Some entrepreneurs can self-fund from personal savings or business profits. Others need to seek money elsewhere.
Both debt and equity financing resources exist for the cannabis industry, according to Scott Jordan who works with entrepreneurs in the industry as director of business development for Colorado-based Dynamic Alternative Finance. The firm has arranged over $27M in loans and leases for cannabis businesses in the past two years by connecting their network of private investors with business owners seeking capital.
Because there are few traditional lending sources available and no SBA or similar government programs for cannabis businesses, Jordan says that small business owners typically take out a home equity line of credit, use credit cards or raise funds from friends and family.
There are some, mostly small, banks what will fund cannabusiness. In Colorado, there are at least eight banks and one credit union actively taking deposits said Jordan.
The first step for entrepreneurs seeking funding for their business is to decide between debt (a loan) and equity (selling a piece of the company).
Debt-based lenders work mostly by the numbers and have a fairly straight-forward application process according to Jordan. “They are focused on what I call the five C’s : credit score, character, capacity to repay, cash flow and collateral,” he said. Business owners going to a bank for help should be able to communicate how much they need, and how it will be spent, and have well-organized current financial information including credit score, balance sheet, and valuation of assets that can be used for collateral.
Equity investors will require a more formal pitch deck describing the team, the product or service, market size, competition, etc. said Jordan. Investors provide funds based on the potential and future expansion of the business and typically seek a larger return on their investment than a debt provider does.
The main additional risk to investors in this industry is that technically, a cannabusiness can be raided and shut down by federal authorities at any time. State and local laws are evolving too, as the news stream collected by WeedWeek and WeedReader demonstrate. The playing field is constantly shifting.
A handful of large venture capital and investment funds are targeting the industry. Privateer Holdings has raised more than $100M to fund legal marijuana businesses. Tuatara Capital, MedMen Capital, and Snoop Dogg’s Casa Verde are other large firms in the industry.
Jordan’s firm helps cannabis companies find the funds to start or expand a business, by connecting them with private investors interested in the industry. The companies may need help leasing equipment or buying real estate. One of the firm's clients, a chain of cannabis store in Colorado, was able to expand from four to twelve stores by taking on outside investors.
To entrepreneurs who will be looking for funding, Jordan says it is important to maintain a strong credit rating and keep excellent financial records. He also says, “Do things both ethically and honestly. Don't take shortcuts because savvy investors will likely uncover any issues in the due diligence phase.”
Looking to the future, Jordan believes there will be more choices available for borrowers. “We're seeing some lenders that are looking for higher yields and returns, venturing into this space,” he said. “In terms of equity, we also are seeing some of the larger hedge funds and other family offices,” getting involved in cannabis finance.
Weed, J. (2017, September 9). Legal Weed Entrepreneurs Finding New Funding New Funding Options. Retrieved from https://www.forbes.com/sites/julieweed/2017/09/09/funding-options-for-cannabusiness-expanding/#6fb7b3597cf3