A Guide to Cannabis Equipment Financing
The cannabis industry is growing at a rapid rate, but one of the ongoing challenges that CBD business owners face is securing equipment financing. Traditional lenders remain skeptical about extending credit to such businesses because cannabis remains an illegal substance at a federal level (despite being legalized by some states).
That is not to say that cannabis business owners can’t qualify for any financing. While you might have a slim chance of qualifying for funding from a bank, many alternative lenders are willing to step up and offer cannabis equipment loans to you.
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What is Cannabis Equipment Financing?
Cannabis equipment financing is simply equipment financing for cannabis businesses. It works like any other equipment business loan wherein the lender provides a lump sum of cash to businesses to purchase the equipment they need. The lenders can finance up to 100% of the equipment, depending on your business’ qualifications and performance.
Additionally, you won’t have to pledge any collateral to secure the loan. With the cannabis equipment financing, the asset being financed with the loan will serve as the collateral itself. Therefore, the loan will be tied up to the equipment until you’ve paid the balance in full.
Why Do Cannabis Businesses Need Equipment Financing?
Cannabis businesses need to build a greenhouse designed to mimic the ideal environment for cannabis growth in order to produce high-quality product. This requires investments in specialized lighting equipment and HVAC systems to maintain the optimum temperature and humidity that ensures maximum yield.
Additional specialized equipment growers will have to invest in includes:
- Cultivating equipment
- Farming equipment
- Harvesting and processing equipment
- CO2 extraction equipment
- Lab testing equipment
- Vehicles and trucks
- Security systems
- Retail fixtures
- Business systems
This can all easily add up to millions in outgoing expenses. Even if your company does have the money to cover these costs out of pocket, it would put an unnecessary strain on the business’ cash flow. It’s simply more practical to finance these expenses.
With cannabis equipment financing, you can pay for the equipment in installments, making it easier on your bank account. Depending on the equipment’s value and estimated lifespan, the repayment period can range from two to 10 years.
What are the Qualifications for Cannabis Equipment Financing?
As mentioned, most of the lenders that offer equipment financing to cannabis businesses are alternative lenders. These lenders are less uptight than traditional lenders and have more freedom to choose whoever they want to lend money to.
When it comes to qualifications, the requirements can vary from one lender to the next. To increase the chances of approval, the applicants must meet the following criteria:
- The operator or business owner must be a licensed cannabis grower
- No unresolved tax liens
- A personal credit score of 650 or higher
- Must be willing to sign a personal guarantee agreement
- No history of bankruptcies in the last seven years
Many lenders may also be willing to extend credit to startup cannabis companies . In some cases, they may lower their credit score requirements to 500 and work with companies with less than six months of business history.
That said, the lenient requirements offered by some alternative lenders do come with a particular downside. Considering the risk, they may charge higher than standard rates. This ensures that in the event of loan default, the lenders won’t experience as much losses.
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Why Is It Harder for Cannabusinesses to Obtain Funding from Traditional Lenders?
The answer ultimately boils down to the rules and regulations of cannabis production. Both the DEA and the federal government considers cannabis an illegal substance. In fact, the Controlled Substances Act still bans the production and use of cannabis, making the market volatile.
Even in states where the substance’s use is legal, state rulings could change anytime, which could possibly lead to the closure of many cannabusinesses. If that were to happen, traditional lenders wouldn’t be able to collect their owed repayments.
Furthermore, banks providing loans to cannabusinesses that have been found to break state laws could not only face negative public backlash, but could face trial along with the business.
Given the complexity of the situation, the risk-averse banks and other alternative lenders avoid lending to these types of businesses altogether. This makes it harder for cannabis business owners to find a lender willing to work with them despite the risk.
For financing institutions that want to serve marijuana businesses in states where it’s legal, they’ll have to work around the law to ensure compliance so they’re not legally liable should something happen. Some lenders may find this too risky and dangerous, which is why many will avoid funding cannabis businesses altogether.
Why Is It Harder for Cannabusinesses to Obtain Funding from Traditional Lenders?
Now that you have an idea of how cannabis equipment financing works, you might be wondering about the steps involved in its application. We’ve gone ahead and done the research for you.
Here are five steps you can follow:
1. Get a quote for the equipment
One of the requirements for equipment financing is a quote from the equipment dealership or supplier. It should have the equipment’s specifications like brand, model, year, and total price written on it. The lenders will use this as the basis of the credit amount they would extend to you.
2. Find a lender
When applying for cannabis equipment financing, shop for offers from multiple alternative lenders. While it can be tempting to go with the first lender you talk to, this could limit you from getting the best possible deal.
It’s worth noting that every lender will have different eligibility criteria. Some might offer acceptable loan terms even if you have a less than ideal credit and financial background. Others may compensate for the risk by charging a higher rate.
This is why it’s always wise to ask for financing quotes from different lenders and compare them before fully committing. Review the terms, specifically the loan amount, rates, and repayment period, and structure. This will help you assess which loan would be the most affordable based on your business’s current situation.
3. Gather the needed documents and submit
Alternative lenders aren’t typically as document-extensive as traditional lenders. Most of the time, they will only ask for the most critical documents. This could include the following:
- Driver’s license
- Voided business checks
- Balance sheets
- Business license
- Cannabis grower license
- Personal and business bank statements
- Equipment quote
Online lenders usually only ask the cannabis business owners to fill out an online application and sync their accounting software to the lender’s system so they can assess the business’ eligibility.
If you’re not sure what documents to secure, give the lenders a call. They can give you a list of the documents you’ll need to submit, along with the instructions on how you can apply for their cannabis equipment financing.
4. Pass the initial interview
After the lenders assess your qualifications, they may ask you to visit their branch personally for an interview. In most cases, the lenders will only ask basic questions, including:
- How much you need
- Why you need the equipment
- How the equipment will impact your revenues or business as a whole
- How you plan to repay the financing
When answering the questions, be honest and transparent. If the lender finds inconsistencies with your answers, it could hurt your chances of approval.
5. Review and sign the equipment loan agreement
After submitting the documents and application form, the only thing left to do is wait for the lender’s decision. Alternative lenders usually have a faster turnaround time compared to banks. Online lenders, for one, can offer approval as fast as 24 hours after the application has been submitted.
Once you’re approved, the lenders will send a loan agreement form outlining the financing terms. Don’t just skim through the agreement. Remember that once you affix your signature to it, it will be binding. Review the loan agreement, including the terms, loan amount, ownership, as well as any fees involved, and make sure it matches what you and the lender agreed to during your initial conversation. If you notice some inconsistencies, contact the lender immediately to clarify and resolve them. If you can, have a business attorney help you review it.
The Bottom Line
Cannabis businesses require several specialized equipment for their business to operate smoothly. Unfortunately, considering how risky the industry is, many lenders might not be willing to extend credit to them.
At present, only alternative lenders are willing to offer cannabis equipment financing to cannabis producers. Though they offer higher rates than traditional lenders, businesses could still find a lender that offers the best terms.
When looking for a lender, be sure to check out their ‘restricted industries’ list. As mentioned, many lenders may avoid working with cannabis businesses because of the risk. Make sure you know whether a lender is willing to work with you before you put in the work to submit your application.
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