Because financing is the most significant barrier to entrance into the cannabis sector, it is critical to plan your approach to overcome it as a challenge. Today we are going to talk about how to raise capital for a cannabis business. There are basically just three ways to finance any business’s growth, whether you’re a corner bodega, a chain restaurant, a cannabis producer, or one of the big three internet firms:
- Profits from your firm are reinvested.
- Obtaining a loan from a lender.
- Selling an investor an equity ownership position in your company
We briefly discussed each method of financing previously. It’s now time to go exploring.
Which comes first: profit or debt?
Before you continue reading, you need to understand your company’s current situation and what you can afford to accomplish.
- Is your company already profitable? Profits are generated when the revenue generated by sales exceeds the cost of generating those sales.
- Will you have to borrow money? Debt often takes the form of credit cards or company loans that must be returned.
- Equity is your third option. Equity financing does not have to be repaid. Businesses raise equity by selling a portion of their ownership to an outside investor.
Congratulations if your company is up and operating and making a profit! You appear to be on the right track. So how to raise capital for a cannabis business? We’ll keep focusing on how new and current cannabis firms should consider financing loan, equity, or both, before returning to profitable businesses towards the end of this piece.
The legal ban of cannabis has severely limited the supply of both loans and equity. Most banks will not even open accounts for cannabis licensees, let alone credit cards or loans to help them run their businesses.
Similarly, the availability of equity financing is limited. Private equity investors, including venture capitalists and angel investors, are frequently restricted from investing in cannabis because to stigma or situational, social governance rules.
Prices rise when supply is limited and demand is high. Low risk cannabis businesses seeking loans would frequently pay more than 25% APR for loans that would cost a quarter of that amount to comparable riskier non-cannabis enterprises.
How to Get a Cannabis Business Loan
You can avoid predatory lending by first assessing your eligibility for a loan or credit. Someone who lends you money and expects you to repay it is interested in whether you make enough money each month to cover your loan payments and if you have a track record of consistently meeting your obligations.
They will also want to see any business or personal assets that can be seized in order to recuperate the loan’s value if you fail to make your monthly payments.
The Small Business Administration provides a helpful checklist for making the best possible case for a loan. While the SBA does not lend to cannabis firms, the Financial Crimes Enforcement Network (FinCen) revealed that 723 banks and credit unions (6 percent of total) around the US supplied cannabis businesses with banking services in 2019.
FinCen has stopped publicly publishing which banks and credit unions filed with them, so if you want to know which banks and credit unions in your state provide services to cannabis companies, we recommend filing a Freedom of Information Act request with FinCen to determine who the filers are.
Other sources of funding for a cannabis company
The Development funds
An innovative approach emerging from Illinois is another worthwhile source of money. After legalizing adult-use cannabis, the state established a $30 million Cannabis Business Development Fund, which would be used to grant low-interest loans to social equity licensees in the state.
The goal was to provide individuals from disproportionately disadvantaged localities with a source of funding to help them establish and grow their enterprises, putting them on a level playing field with deep-pocketed multi-state operators. Washington, Colorado, and several more states are considering similar initiatives.
The portrayal you create for a bank lender or government agency should be the same one you create for more informal lenders like your mother or father, previous boss, business partner, or wealthy uncle.
Friends and family
We urge you to seek beyond institutional lenders and communicate with people who believe in your company strategy. Relying on relatives and friends for loans is recommended (especially early on), with the advantage that they fully understand and accept the risk of giving money to your firm.
In reality, a prevalent misperception in equity financing is that the only feasible investors are multi-million dollar venture capital organizations. In truth, most enterprises’ first equity investors are generally supportive family members and friends.
Investments from an investment group are excellent, but it is much better to get investments from other like-minded people who share your vision and want to help you grow it.
Calculating equity stakes
While loan investors seek an instant return, equity investors are not seeking for a quick repayment. When it comes to how to raise capital for a cannabis business, an equity investor’s purpose is to assist your firm’s growth so that their investment grows in value as your company matures.
Having an equity ownership in a firm is effectively owning a piece of the company, and those stakeholders are typically in it for the long haul, hoping that their investment will contribute to the company’s success.
New business owners run the danger of dramatically overvaluing their firm as well as vastly undervaluing it. Overvaluing your firm scares off intelligent investors as well as those who feel your company is overpriced. Undervaluing your firm might result in you losing majority ownership or control in the long run.
It is vital to evaluate your company’s worth before selling a share of it to anyone. The only method to assess the value of an investment is to compare it to the entire value of the firm.
How to raise capital for a cannabis business? Among the methods for determining your company’s worth are:
|The Method||The Function|
|Use the whole of your anticipated expenditures to establish your firm.||For pre-operational businesses, consider all of the costs associated with being operational. Investors’ equity will be proportional to the percentage of costs covered by their capital.|
|Determine the total worth of all assets.||Add up the worth of everything your company possesses (licensing, merchandise, real estate), then remove any debts or liabilities (loans, accounts payable, taxes)|
|Use a multiplier of yearly sales value.||Calculate your yearly revenue first, then multiply it by a multiple to determine how much your company model is worth for a certain amount of sales income. Determine multiples by examining similar cannabis firms’ revenue, growth, and value indicators.|
|Make use of your price-to-earnings ratios.||Determine your worth by estimating your price-to-earnings ratio based on your predicted yearly earnings.|
|Conduct a discounted cash flow analysis.||A discounted cash-flow analysis is a forecast based on a company’s yearly cash flow. Use a “net present value” calculator to figure this out.|
If you effectively employ loan and equity to fund your firm, you will be able to access the third, previously stated source of financing – earnings.
Profitability is the ultimate objective of all businesses, and after a few years of solid operations, the profit your firm creates may be returned back into the organization.
When the cash generated by operations sustains growth and development, the firm has genuinely become viable and is ready to scale and expand.
We hope that our article on “how to raise capital for a cannabis business” will help you at the beginning of your journey and open the gates for your cannabis business.