How to Get Financing for a Marijuana Business
All startups need funding options to succeed in their respective market. But the status of marijuana at the federal level makes things complicated. As a result, financial institutions and lenders have shied away from cannabis business owners. Even so, a few banks and credit unions have begun providing merchant services. These services include lines of credit, credit card processing, and even some loans. Several private investors and alternative lenders have also taken advantage of these investment opportunities.
This article provides financing solutions for small business entrepreneurs seeking marijuana business loans. It also looks into why institutional banks have been hesitant to get involved.
Why Most Banks Avoid Cannabis Business Loans
The main reason banks will not provide business financing to marijuana ventures is because of Federal Deposit Insurance Corporation (FDIC) regulations and policies. Generally speaking, the FDIC will not insure a bank that takes on "existential" risks. This includes loans to companies in violation of federal law. Yet, some banks are willing to consider financing options for marijuana-related businesses. These businesses avoid the legal risk of actually "touching" the plant.
Banks are also hesitant to offer business funding to cannabis companies before the federal legalization of recreational marijuana. This is because banks want to avoid criminal liability. A bank that funds a cannabis business could get charged with aiding and abetting. Accepting deposits from a cannabis dispensary is technically money laundering. But the federal government has rarely enforced this. The Department of Justice tolerates marijuana businesses in states where it's legal, such as Colorado. Until the federal government legalizes the recreational use of marijuana, cannabis financing options will remain slim.
Private Equity and Other Sources of Financing for Cannabusinesses
Several private investors have taken up the slack. These investors back marijuana businesses in the relative absence of bank loans. They include venture capital funds, angel investors, and marijuana business consulting firms. Like a bank, a private investor requires a cannabis business to go through a loan application process. In general, a private investor needs a marijuana business seeking a loan to:
- Be incorporated
- Have a business bank account in the business's name
- Have a business plan
- Be in compliance with state law
- Provide monthly and annual gross sales figures
- Have a credit score of at least 500
Below are a few examples of private investors for cannabusinesses. Please do your own research before selecting a company. Mentioning these businesses here does not mean Find Law sponsors or endorses them. This is merely a resource for our readers.
An example of a cannabis investor is Mentor Capital, Inc. Mentor Capital is a California-based public operating company. It primarily acquires and invests in medical marijuana ventures.
Seattle-based Privateer Holdings is yet another private equity firm targeting the cannabis industry. Privateer Holdings invests in Canadian ventures. This is because Canada has legalized the medical use of marijuana.
Lastly, GUD Capital connects marijuana business owners with direct lenders who can help with:
- Commercial real estate loans
- Equipment financing and leases
- Cash advances
Marijuana businesses need a way to deposit money. They also need to write checks to partners and employees. Some marijuana dispensaries use traditional banks. If so, they may hide the true nature of their business. Some even go as far as spraying their cash with air fresheners to cover up the tell-tale odor of marijuana. Others use third-party services for debit card sales and related merchant services.
With the growing legalization of marijuana at the state level, these challenges should subside in the future.
Need Capital for Your Cannabis Business? An Attorney Can Help
Securing financing for a marijuana business is quite difficult. But the rewards are huge in this growing market. It's very important to understand current laws and stay ahead of the curve. As with any other type of business loan, it's smart to have an attorney's eyes on the terms of the loan. Contact a cannabis law attorney near you for legal advice.
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