What is Cannabis Equipment Financing?
Many cannabis companies require specialized equipment to develop and deliver high-quality products to their customers. However, businesses often lack the capital for purchasing equipment outright.
Equipment financing helps solve this catch-22 by allowing cannabis businesses to acquire the necessary equipment on credit. Financing options include equipment loans and leases.
However, the marijuana industry faces the unique challenge of limited lending options due to the legal nature and perceived risk of the industry. Companies involved in legal, recreational, or medical marijuana must put in some additional work to find lenders that work with them.
Why is business financing challenging for the Cannabis Industry?
Despite most Americans supporting legalization, marijuana remains illegal at the federal level. It’s still a Schedule 1 narcotic, listed in the same category as heroin. As a result, there are significantly fewer resources available for cannabis business financing.
The cannabis industry often experiences a higher risk of loan defaults compared to other sectors. Cannabis equipment financing may come with higher costs, including points and interest rates, compared to other industries.
Because of the continued federal prohibition, many banks and lenders won’t do business with the marijuana industry. Most cannabis dispensaries can’t even open business bank accounts and are cash-only, although a few have started using cryptocurrency.
Most lenders require business bank account statements and other paperwork to verify a business. It also provides lenders with additional avenues to pursue compensation in the event of a default.
Traditional lenders, such as banks and credit unions, typically do not offer funding to cannabis companies. Most cannabis businesses cannot secure a conventional bank loan. Most alternative business lenders also don’t lend to risky industries like marijuana, gambling, adult entertainment, or firearm businesses.
However, some lenders and marketplaces, such as United Capital Source, recognize the unique business opportunities and funding challenges that this growing industry presents. Much like you, these financial services companies are willing to bet that the industry’s future can outlast perceived risks.
How does Cannabis Equipment Financing work?
Alternative lenders specialize in tailored financing options with competitive interest rates for the cannabis sector. Equipment financing can provide better cash management. Equipment loans offer flexible financing. Additionally, some alternative lenders provide expertise in the cannabis industry, which can help businesses find the most suitable financial solutions.
Equipment loan features include:
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Amounts: Up to $5 million per piece of equipment.
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Factor rates: Starting at 3.5%.
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Terms: 1-10 years.
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Funding time: 3-10 business days.
Equipment financing can provide up to $5 million for the purchase of new or used equipment. The asset is the collateral for the loan. This is called a self-collateralized loan. You may be familiar with other self-collateralized loans, such as auto loans or mortgages.
The process typically begins with obtaining an invoice from an equipment vendor. You then apply for the loan using the invoice.
The lender pays the equipment vendor directly, sometimes for up to 100% of the value, meaning you don’t have to make a down payment. The vendor then delivers and installs the equipment, allowing you to use it immediately.
You’ll make fixed monthly payments until the loan is paid in full. Equipment financing terms typically range from 24 to 72 months, providing significant flexibility for businesses. The lender holds a lien on the title to the equipment. Once you make the last payment, the lender releases the lien, and you own it outright.
Cannabis equipment financing is subject to strict regulatory compliance, and lenders must be familiar with these regulations. Post-revenue, profitable cannabis businesses generally have access to better rates and terms than startups. Cannabis businesses may need to provide a down payment of around 35% for startup financing.
What are the qualifications for Cannabis Equipment Loans?
Approval for cannabis equipment financing often depends on credit history, the length of time in business, and annual revenue. Most approved cannabis business owners meet the following minimums:
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Annual revenue: $250k.
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Credit score: 600.
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Time in business: 1 year+.
What are the advantages of Cannabis Equipment Financing?
The primary advantage is that you can acquire expensive cannabis equipment without incurring a significant capital investment. Whether you don’t have the liquid funds to pay for the equipment or don’t want to risk depleting your cash reserves, financing lets you get the equipment you need now and pay over time.
You also have access to a convenient online application with a straightforward approval process. Once approved, the funds are disbursed quickly, allowing you to start using the equipment.
It’s possible to get equipment financing with a less-than-perfect credit score. The recommended minimum is 600. Lenders that work with cannabis businesses may also have industry expertise that can help you overcome challenges in the cannabis sector.
The equipment is used as collateral, meaning you won’t have to add additional assets. You could potentially borrow 100% of the asset’s market value, meaning no down payment.
What are the disadvantages of Cannabis Equipment Financing?
The most significant concern with equipment financing is whether it becomes obsolete before the loan is paid in full. In an ideal scenario, the equipment would last well after the loan is paid off, increasing its lifetime value to your business. If it becomes obsolete, the equipment is worthless when the loan is repaid.
Another issue with equipment loans is that you’re responsible for maintenance. Although you can sometimes obtain a warranty to replace the equipment if it malfunctions due to normal wear and tear, it is not guaranteed.
All loans incur costs in the form of fees and interest. While equipment financing lets you acquire what you need on credit, you’ll wind up paying more for it than if you purchased it outright.
A challenge specific to the cannabis companies also includes difficulty finding equipment lenders. While you still have options, they’re more limited due to the perceived risk of the industry.
Pros & Cons
Pros:
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Increases purchasing power for cannabis equipment.
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Easy application & approval process.
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Loan funds get disbursed quickly.
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Doesn’t require a perfect credit score.
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The equipment serves as collateral.
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Possible to finance 100% of the market value.
Cons:
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The equipment could become obsolete before the loan is paid off.
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You’re responsible for maintenance and repairs.
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Loans cost more because of interest and fees.
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Cannabis companies have more limited lender options.
How do I apply for a Cannabis Equipment Loan?
The business equipment loan application process is straightforward and efficient. You can apply directly through our one-page application in a matter of minutes or contact one of our loan experts to guide you through the process.
Step 1: Ensure the equipment is the right purchase for your business.
You want to make sure the equipment you’re financing is worth the cost of the loan. As you repay the loan, you will build equity in the equipment. You want to ensure the equipment is built to last or will at least have resale value at the end of the loan. Also, as you build equity, you can use that for future business loans.
Some things to consider include:
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Will the equipment still be useful when the loan is paid in full?
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What are the anticipated maintenance costs?
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Can your cash flow support monthly payments?
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Is the interest rate competitive with other lenders?
Step 2: Gather your documentation.
When applying for cannabis equipment financing, you need to provide the following:
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Driver’s license.
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The invoice for the cannabis equipment.
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Voided check.
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Bank statements from the past three months.
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Financial statements.
Step 3: Complete the application.
Go to our application page or give us a call for more information.
Step 4: Speak to a Representative.
After we receive your application, a senior account executive will contact you. The account executive will discuss your business needs and focus on the cannabis equipment financing options and fixed-term business loan offers. We offer complete transparency. There are no hidden fees or surprises.
You’ll get a complete breakdown of loan amounts, terms, interest rates, and fees. Once you have all the information, you can decide about your cannabis equipment financing.
Step 5: Get Approved.
Your equipment loan is approved when your application meets underwriting requirements and receives credit approval. Next, your money goes directly to your account. We can help you set up automatic payments, or you can arrange to pay by check or electronic payment.
Frequently Asked Questions
Here are the most common questions about cannabis equipment financing.
What types of Cannabis Equipment can I finance?
Cannabis growers, cultivators, dispensaries, and ancillary businesses that support the industry often require a wide range of equipment. Fortunately, it should be possible to finance most new and used equipment if there is a business need for it.
Here are a few examples of what you can finance:
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Display equipment
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Temperature-controlled storage
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Computers, computer accessories, and office furniture
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Closed-loop extraction system
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Rosin press
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Trichome separators
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Cultivation equipment
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Harvesting equipment
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Packaging, labeling, & shipping equipment
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Armored trucks
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Hydroponic systems
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Heat lamps
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And more
Is it better to finance or lease Cannabis Equipment?
There are benefits and drawbacks to both equipment leases and loans. Choosing the right one largely depends on your business needs and the equipment. Financing options for cannabis businesses include traditional banks, private investors, and hard money lenders.
Cannabis Equipment Leasing Options
Leasing equipment gives you a little more flexibility. You can typically get approved with lower credit and have a lower monthly payment. Replacing existing equipment at the end of the lease term is easier. In most cases, the leasing company covers the cost of repairs and replacement.
However, you do not own the equipment as you’re essentially renting it for a prolonged period. Many leasing companies limit how you can use the equipment to protect their asset for resale. This option is better if you’re expecting a short lifetime of use.
Lease terms for cannabis equipment financing are typically 2 years with full amortization and a $1 buyout at the termination of the lease.
Cannabis Equipment Loans
With equipment financing loans, you own the equipment. You can resell it or continue using it at the term’s end. The only real downsides are that you’re responsible for maintenance, and the equipment could become obsolete. However, if you’re confident the equipment will have an extended lifetime use, you’ll get the most for your money with an equipment loan.
Visit our equipment financing calculator to get an estimate of what you can expect to pay for your new cannabis equipment.
Do banks offer Cannabis Equipment loans?
It would be very challenging to find a bank that will finance cannabis equipment. Some local banks in legal states might consider cannabis financing programs, but most national commercial banks won’t invest in any aspect of the cannabis industry.
Cannabis Equipment Loans – Final Thoughts
One of the challenges for small business entrepreneurs seeking to enter the cannabis industry is competing with large corporations. These commercial enterprises often have the available capital to fund an equipment purchase without financing.
With lenders refusing to finance the industry, many aspiring cannabis entrepreneurs are stuck between a rock and a hard place. Fortunately, some lenders are willing and able to be funding partners to help fuel your cannabis business ownership dreams.
By financing equipment, you’ll have the resources necessary to develop and deliver your products. That gives you the time and freedom to focus on branding, marketing, and putting the best possible product on the market so that you can compete with cannabis businesses, big or small.
Contact us today if you have more questions or want to apply for an equipment loan. Our loan executives can help you find the best funding program for your bus
