Getting financing as a cannabis company is littered with federal and banking obstacles that prevent cannabis companies from securing funding to scale. Even entrepreneurs with sizable earnings saved up may require non-traditional financing options to be financially prepared.
Michael Grillo of financing company Helo Capital, specializes in merchant cash advances for businesses looking to get quick capital even with complicated credit scores. Cannabis-friendly financing companies like Helo offer an opportunity for businesses that have nowhere else to turn.
Alternative Financing Options Overview
Alternative financing companies like Helo Capital “lend to small businesses when the banks won’t.” They purchase future receivables from a client at a discount and then the client repays that on a daily, weekly, or monthly payment schedule, depending on the credit and length of the term of their business.
Helo Capital, in particular, has the following options for anyone in the cannabis sector is making 3 million annually:
- Term loans up to $5 million with a term up to 24 months
- Can lend against Account Receivables, inventory, machinery and equipment and real estate
- Revolving line of credit
For companies that make less than $3M annually, there is still an opportunity to use real estate as leverage. “We recently funded a CBD company 50K unsecured capital that was having a hard time even keeping a bank account open due to the banking laws around the industry. However, they did have correct bank statements,” says Grillo.
5 Ways to Streamline Financing & Prep for Growth
Keep a Record of Finances
Many cannabis businesses are dealing with cash-only operations due to the federal government’s restrictions on cannabis. National banks won’t risk lending to companies that deal directly or indirectly with the cannabis plant.
Grillo suggests business owners should meticulously keep a record of their finances, even if the operations are technically “off-the-books.” Financing companies look back up to two years into business operations.
Helo Capital combs through a company’s previous 4-month business bank statements. Financing companies won’t accept personal statements, but banks are making it hard to get business accounts.
Set Up a Business Account
Prospective clients are required to provide previous months’ bank statements for assessment of the purchase of future receivables against a business. These numbers are entered into an algorithm that determines a client’s monthly average revenue total.
For example, if a company makes $100,000 on a monthly average over the previous 4 months, a financing company would lend them about $100,000 with varying term lengths depending on the credit score and state of the industry. Financing companies, generally, offer short terms for quick capital in this high-risk industry.
File Tax Returns ASAP
Banking restrictions paved the way for alternative lenders like merchant cash advance companies that can provide capital based on business bank statements.
Grillo suggests cannabis companies should start filing tax returns as soon as possible to position themselves better when they walk into a credit union or local bank when trying to get a business account. Even if companies do find the right bank, it can be a slow and burdensome process getting the account set up.
Find a Cannabis-Friendly Bank
Companies have turned to local banks and credit unions for support. The problem is that these banks can have a long waiting list for businesses to open an account.
Grillo suggests calling banks and asking them upfront if they’re interested in opening an account for licensed cannabis businesses and how long the waiting time is for the account to be operational.
Equity and Assets
Cannabis companies can put up their commercial or rental real estate. For example, a client can own a grow facility worth $1,000,000 with an almost-paid-off mortgage. Financing companies will lend the company anywhere from 65 to 70 percent of whatever the value of the asset is, depending on credit.
Borrowers can choose from short-term options that begin with interest-only payments for 12 months and then a balloon payment at the end or longer-term financing with clients with better credit scores. Even clients with 500-550 credit scores have been able to receive funding.
Merchant cash advance services can typically get an approval amount within 24 to 48 hours if all the paperwork and bank statements are ready. For asset approval, alternative lenders can take about 3 weeks to a month to perform a property evaluation for long-term capital.
Asset-based lenders may also consider certain cannabis-related equipment as an asset. If the equipment is paid off in full, financial lenders will lean the equipment and lease it back. Despite this option, Grillo says “you’ll get the most loan-to-value ratio if you use real estate” as an asset.
Alternative lenders will cash out re-finance a commercial or rental property, not residential, and put a brand new first position mortgage on it, transferring the cash to the client. Terms fluctuate depending on the client’s credit and the rate will be higher than traditional mortgages.
For alternative real estate lending, the term is, on average, 8 to 10 percent for lower credit clients. “The highest I’ve seen rates with closing fees and everything was around 15 to 16 percent,” says Grillo.
Alternative lending is paving the way for cannabis companies to have an opportunity to succeed when the big banks won’t bank on them, and more options are coming online every day.
Want to learn more about our financing options? Get more information about equipment financing options at the link below.