This is actually a common problem for many entrepreneurs. However, with a thriving market, there are many solutions out there for cannabis financing. Let’s take a look at the background behind the cannabis financing issue and how to evaluate cannabis lenders.
Why Does it Seem So Difficult to Get a Cannabis Business Loan?
As you likely know, marijuana laws vary from state to state. Currently, there are 19 states where recreational marijuana is legalized and an additional 16 where medical usage only is allowed. However, the substance still remains illegal at the federal level which leads to a confusing and overly bureaucratic issue for traditional lenders who may want to become cannabis lenders for cannabis business loans.
Most traditional banks do not provide cannabis business loans or banking services for your dispensary. This is due to the fact that there are many federal oversights of the banking industry. Since banks are heavily regulated by the federal government, this means they are prohibited from engaging in the cannabis business even when it comes to something as simple as extending cannabis financing to a small business.
Chances are you may have approached your local bank or credit union in order to obtain a cannabis business loan only to find out that they would not issue loans to your type of business. This is an increasingly common problem for companies trying to obtain cannabis financing.
For many people, the solution is increasingly becoming obtaining cannabis financing outside of traditional financial institutions. You will find that there are many companies that will allow you to apply for a cannabis business loan. But how do you know which is a good company and which isn’t? Here is a list of things to look for in cannabis lenders.
Things to Look for in Cannabis Lenders
Before you apply for a cannabis business loan from the first place that comes alone, you should take some time to evaluate the options. After all, that’s just good business sense. Here are the things you’ll want to look for as you explore options for cannabis financing.
Loan Requirements
One of the first things to consider when evaluating cannabis financing options is the requirements for the loan application. This can vary quite a bit from one cannabis lender to another. Typical requirements for cannabis business loans may include things like a credit score, income, debt-to-income ratio, and collateral. These can be an issue for many applicants, particularly if debt-to-income ratio is involved in the assessment.
Fortunately, there are cannabis business loans that require as little as a good credit score for approval. This can be useful if one of these other metrics would otherwise disqualify you from some lenders. Additionally, cannabis lenders with fewer requirements can allow you to access funding more quickly, helping you move along the path to getting your business started.
Interest Rates
Perhaps the most important factor for evaluating the merits of any loan is the interest rate that you will pay. This is particularly true with cannabis business loans. Most loans will typically charge a set amount of interest that is compounded monthly. This means that your balance will begin increasing almost immediately.
However, a better and more financially sound option for many are loans that ultimately treat the money more like a line of credit. With these types of loans, you will only begin paying interest on capital that you actually use. This can greatly decrease your interest costs over time and is one of the most important things to look for when evaluating cannabis financing. Some loans organized like this can even provide 0% interest for up to 18 months.
Timeliness
When applying for a cannabis business loan, be aware that the amount of time it takes to get your money is another thing that will vary widely from one cannabis lender to another. With some lenders, the application process, approval process, and administration process can take months. If you are wanting to start your business, this can cost you precious time. Meanwhile, if you simply need money for ongoing business needs, this time can be devastating.
Fortunately, some cannabis lenders are able to issue loans in as little as two weeks. This can be an important factor when thinking about cannabis business loans. If timing is not very important to you, this probably won’t rate high on your scale of importance. However, if you would prefer a quick process to access funds, this is certainly something to consider.
Origination Fees
One of the frustrating parts of cannabis business loans can be having to pay an exorbitant loan origination fee. If you’ve taken loans in the past, you know that many lenders include lots of fess as ways to nickel and dime clients, providing them with more profit. However, this does not have to be the case when it comes to cannabis financing.
There are cannabis lenders that provide loans with low origination fees or even without fees as well. For people trying to limit upfront costs, this can be a very good option. Some of the most preferred types of cannabis business loans are relatively fee free loans that simply charge a tiny success fee based on how well your business does.
Cannabis Lender Reputation
A core thing to think about when evaluating cannabis financing is the reputation of the lender. While the cannabis business is relatively young, you don’t want to necessarily put your trust in a brand new company. Instead, you want a reliable lender who you can trust will be able to be around for the long haul while providing you with quality service.
Be sure to check for things like professional website and social media accounts (particularly LinkedIn) that can provide more information helping you evaluate the company. Additionally, contacting the company for more information is a great way to get a sense of the level of service they will provide.
Ready for a Cannabis Business Loan?
If you are ready for a cannabis business loan, we would welcome the opportunity to provide you more information about our process and answer any questions that you have. Feel free to contact us at your convenience.