Banks and credit unions are certainly taking their time warming up to the marijuana industry. Such institutions have been legally permitted to provide small business loans to marijuana businesses since 2014 but more than two years later, less than 40% of marijuana businesses have bank accounts.
That number isn’t expected to grow as long as marijuana remains federally classified in the same category as heroin. The revenue generated by marijuana businesses is technically rooted in an illegal substance, and the few institutions that do work with marijuana businesses offer very limited services, like direct deposit and sending tax payments to the state.
AN UNFAIRLY ROUGH ROAD AHEAD
Starting and maintaining a marijuana business is incredibly expensive. The cost to purchase warehouse space in Colorado has reportedly doubled over the past two years, and marijuana businesses must pay an extra 10% on federal employee withholding taxes because they can’t pay them electronically. Marijuana businesses also aren’t eligible for the same tax deductions as traditional small businesses, forcing them to double or triple the amount of taxes they would normally pay, reports ThinkProgress.
A viable solution to these funding difficulties lies in alternative business financing, and no, we’re not just talking about investors. Giving up a stake in your marijuana business is much more expensive than, say, securing a working capital loan, especially if your company is poised for a buyout.
THE BRAVE FEW MAKE THEIR MOVE
Colorado-based vaporizer company Green Smoke, for example, was purchased by Altria Group for $110 million. If Green Smoke had given away 10% of the company, they would have had to pay $11,000,000 at the time of the sale. Another option could have been giving up 10% debt equity in exchange for $2 million in working capital with 18% interest over the course of two years. This would have cost them just $2,360,000 at the time of the sale.
Sources of business funding are sparse for the marijuana industry but according to Cashnibis, several Colorado marijuana businesses have received millions in working capital loans, real estate loans and equipment financing. These companies were able to prove good cash flow, had a strong financial history, and were seeking at least $250,000. In regards to working capital loans, terms ranged from 12-24 months with rates starting from the mid-teens up to more than than 20%. Cultivation equipment cannot legally be used as collateral, so a down payment of 35 to 45% is usually required.
Marijuana business loans are available for California businesses as well. San Francisco-based SPARC was previously looking to expand its grow facility from 10,000 to 25,000 square feet. The company was recently able to make this happen by securing a $430,000 three-year lease on equipment.
A HELPING HAND FROM SOON-TO-BE CUSTOMERS
Another method of alternative business financing that is beginning to gain traction for marijuana businesses is crowdfunding.
Eaze Solutions, a San Francisco maker of technology for marijuana delivery services, utilized crowdfunding to fund part of a $1.5 million expansion. Redwood City’s Loto Labs was able to crowd fund more than $220,000 to fund production of a new vaporizer. Potential donors are understandably suspicious of up-and-coming marijuana businesses, so many tend to prove legitimacy with the use of graphs and videos that outline their goals.
There are even cannabis-centric crowdfunding platforms like Cannafundr, Potfundr, WeCanna, and CannaDabbaDo for marijuana businesses that may have been rejected from popular sites like Indiegogo and Kickstarter. Most marijuana businesses that have found success from crowd funding, however, did so because they were able to secure partnerships with angel investors and venture capitalists looking for a stake in the business.
THE DISCRIMINATION ENDS NOW
In addition to federal law, the marijuana industry’s risky reputation is also attributed to the constant changes in regulations, some of which can have detrimental effects on cash flow and make it extremely difficult to repay debt. United Capital Source specializes in providing funding for companies that regularly experience inconsistencies in cash flow, and has never rejected a potential borrower solely because he or she belonged to a stereotypically “risky” industry. Terms are extremely flexible, allowing business owners to pay off debt without trouble despite the most extreme, seasonal drops in revenue.
Is your marijuana business ready to expand, but you don’t have significant credit history or cash on hand for a deposit? Call 855.933.8638 or visit the UCS website to chat with a business funding expert who has solved this dilemma many times before. Potential borrowers are judged exclusively by performance, so if the cash flow is there, you will not miss out on your chance to cash in on the world’s fastest-growing industry!