Like just about any other capital-intensive business, you’re probably going to want to finance some of this stuff, but you’ve probably found cannabis equipment financing is not so easy as if you were financing something like an ultrasound machine or a dump truck.
It turns out that most lending companies are not willing to finance equipment in the marijuana space, but we’ve found some solutions that can be good depending on your particular situation.
What is Required to Get Equipment Financed in the Marijuana Business?
First and foremost, obviously your business needs to be in one of the 26 states that has legalized cannabis in one way or another. Beyond that, it depends.
If you’ve been in business for a year or two (like many business in California, for example) it’s a little bit easier. For existing businesses, there are two programs, a “good credit” program, and a “bad credit” program.
Both of these programs require a full analysis of your financial situation, including
- Bank Statements
- Tax Returns
- Personal Financial Statement
- Company financials
- Credit Application
Yes, that’s a lot of stuff, but the lender is taking risk that is positively off the charts. It’s risky enough lending to a small business – but in an industry where when the city you’re in decides it doesn’t like your business, it just put everyone out of business, expect the financing to be just a little bit tricky.
For a company where all owners have at least decent (650+) credit and some time in business, financing is available, though you’ll need to make a down payment or post collateral equal in value to at least 20% of the amount you need to borrow, and it could be more depending on how good or how ugly your financials look.
With under 650 credit, you’ll be limited to borrowing around 10% of your annual revenues (so, if you are buying equipment that costs $75,000 you need to be doing at least $750,000 in sales per year). You’ll also need to make a security deposit of at least 10% (but often higher) and may be required to come up with collateral.
How can a New Business Qualify to Lease Cannabis Equipment?
If lending to an existing cannabis business is risky, lending to a cannabis startup is astronomically risky. For that reason, it’s a little bit tougher if you’re new, but not impossible.
Depending on your credit and if you have collateral, there are a few programs available to you. The “good credit” program is similar to the “good credit” program we outlined above for existing businesses, but you can expect the hurdles to be higher. In all cases, you can expect the documentation process to analyze your business to be similar to that explained above for an existing business.
When a customer doesn’t qualify for that program, we can often get them funding if they have some assets. In general, we’re going to look for 2X collateral coverage. What this means is that if you’re buying $75,000 worth of equipment, if you can post $150,000 in collateral, often times the deal can get done. Collateral can be anything that can be easily sold: real estate, vehicles, machinery, etc.
Depending on the equipment you’re financing, the 2X collateral may not be necessary – if you’re funding an extraction machine, for example, that’s pretty salable or “hard” equipment, so in some circumstances you might need to come up with less. If you’re financing grow lights, however, there is not a lot of resale value on used light bulbs, so you can expect the 2X collateral to be pretty firm.
What are the Rates to Finance Cannabis Equipment?
Existing Businesses: For these programs, rates vary, but with good credit and a 4-year term, a good starting point would be to assume payments of about $1,500 monthly per $50,000 borrowed, while a bad credit borrower might expect to pay around $2,000 per month.
For New Businesses, more the added risk leads to a little bit higher rates, so for that same transaction, you might be looking at $1,600 monthly with great credit, $2,000 monthly with just ok credit, and $2,400 monthly if your credit is bad.
Obviously, the rates can be pretty high to finance equipment in this market, but as long as you’ll use the equipment to make a lot more than what the payments are, your alternative is to not have the equipment.
Equity Versus Debt Financing In the Marijuana Business
When we talk to folks in the industry, they’re often stunned when we talk about the stringent requirements in financing marijuana startups. Almost every time, we hear, “yes, but they’re going to make a lot of money so it’s really not that high of a risk.”
Someone providing loans is not equipped to analyze future cash flows of a company. In general, a lender’s task is to analyze risk either based on prior sales (and profits) or based on what they can take from you if you don’t make your payments. In finance-speak, that’s called “debt financing.”
Someone who gives you money based on projections of the future is only going to do so based on taking some level of ownership, also known as “equity financing.” The theory behind equity financing is that a lot of the companies will fail, but as long as you make a so much money on the winners that it doesn’t matter about the ones you lost money on, everyone comes out ahead.
If you have no sales and no assets, the only way you’re likely to get money is to find equity investors, also known as “venture capital.” There’s a lively market out there to fund marijuana businesses right now, so while debt is always better than equity for you, if you need to give part of your company away in order to be in business, that’s something you should look into.
A good place to start is look at directory websites such as THCBiz.com, some of the companies that back the major shows, such as the Cannabis Capital Summit, or the major players within the National Cannabis Industry Association.
Vendor Resources for Cannabis Equipment Funding
If you’re a vendor that sells equipment to businesses in the marijuana space, we’re happy to provide you some guidance about getting your customers financed – if you can’t help your customers get money to buy your equipment you’ll sell less equipment.
We can’t promise miracles, but what we can promise is that we’ll be fair, transparent, and do everything we can to help your customers get financed.
Smarter Finance USA can help you fund cannabis equipment. For more information, please call us at (800) 786-5696 or click in the picture below.