Cannabusiness Funding: Private Equity Vs. Alternative Lending
The cannabis industry is booming. From manufacturers to dispensaries to cannabis-specific marketing companies, the opportunities to capitalize on this fast-growing industry by starting a cannabusiness are endless.
More states are legalizing cannabis for medical and recreational use every year. 10 states and Washington DC have already implemented this change, and Illinois has this on the docket for the start of 2020. Federal legalization is waiting around the corner. There’s never been a more lucrative time to break into the industry.
At the moment, though, cannabis remains federally illegal. Unfortunately, there’s no way to get funding from a bank.
In light of this barrier, many cannabis business owners yearning for more turn to one of two options: either private equity or alternative lending.
Both of them have obvious advantages, but which is the best route for your cannabis business to take to get funding?
The Quest for Cannabusiness Funding
The market is rife with opportunity, but opening a cannabis company isn’t exactly cheap. Start-up costs alone float around $725K for a dispensary.
To make things more complicated, there are endless obstacles that cannabusinesses must overcome.
As a Schedule 1 controlled substance, banks and credit unions are prohibited by law from lending to your cannabis company. Online lenders might not have their hands tied quite as tightly, but err on the side of caution regardless. Long-standing industry prejudice stemming from this federally illegal status leads to inevitable application denial right off the bat, in almost all cases.
But finding financing through other means could make a world of difference, especially with cannabis industry projections highlighting the true potential for persistent entrepreneurs.
By 2022, legal recreational sales could be double medical sales, climbing as high as 22 billion.
So for cannabis entrepreneurs approaching the next threshold, what options are available?
Cannabusiness Funding Through Private Equity
The first option along the road to business growth is venture capital. After finding a venture capitalist willing to provide financing, many cannabis entrepreneurs stop looking, but that’s not always the best decision. We’ll touch on that more later.
Private equity investors like angel investors and venture capitalists provide funding without expecting repayment in the future. The better your company promises to solve a problem, the larger the check.
The cannabis industry experienced an investment boom last year, increasing to $13.8 billion in total volume, from $3.6 billion the previous year.
However, taking on investors (of any type) is a permanent decision, and one that will change the trajectory of your cannabusiness forever.
What Are the Benefits?
On the surface, taking on venture capitalists might seem like a no-brainer, for a few reasons.
- No fixed requirements, instead focusing on promise and potential profit
- Can bring valuable experience and/or direction to the table, in a time when young companies might not know precisely where to go
- Will provide readily available additional financing, without expecting repayment in the future
So, What About The Disadvantages?
WIth the benefits in mind and easily accessible capital dangling in front of them, it’s easy for cannabis companies to say yes. But after taking on an investor, you’ve solidified what will become a lifelong relationship. This means a few things for you, your cannabis company, as well as any other partners involved:
- You’ll lose undivided control over your cannabis company, and be forced to comply with the direction they ask you to take the company in
- You’ll lose full access to your profits, and instead must pay out the agreed-upon percentage of profit share or amount on a regular basis
These negatives apply to all forms of private equity, including angel investors and venture capitalists, as well as any other equity-based contributor you might come across in your search.
When everything is said and done, taking on private equity investors can actually be a much greater cost than small business financing. It’s a quick ticket to the fast lane for business growth, but it compromises on many of the benefits that took you down this road in the first place.
Quick and Simple Cannabis Funding Through Alternative Lending
With bank funding out of the question altogether, and private equity cutting out a major portion of your bottom line, many cannabusiness entrepreneurs turn to alternative lending.
Alternative lenders don’t face the same regulations that the government imposes on big and small banks. This is because the capital they contribute comes from private sources, rather than personal checking and savings accounts. While they can’t operate outside of the law altogether, they aren’t beholden to the same industry restrictions.
Luckily for cannabis entrepreneurs, alternative lenders don’t have the same stringent time and profit-related qualifications that banks do, either. While you might have difficulty obtaining funding for a start-up just beginning the journey, you won’t encounter the same obstacles if your cannabusiness has begun to establish itself as a growing brand.
Well, What Do You Need to Qualify?
To qualify for cannabusiness funding through an alternative lender, all you need is:
- 1 year in business
- $10K in monthly revenue
- No minimum FICO score
By simply contacting an online alternative lender, you can start exploring your options right away!
The obvious disadvantage here is that by nature of the financing process, you’ll need to make payments, with the frequency dependant on the nature of the agreement you strike with the lender. When you examine the math behind this process, though, you’ll find that it’s actually a better deal for your business in the long run.
After making the final payment on your cannabusiness funding, you’ll be free from this debt forever. Then, you’ll have complete and undivided control over the profit you generate, rather than being forced to contribute a share to your investor forever.
The Short (And Long) Term Cost of Both Methods
Let’s take a look at an example.
If you borrow $80K from a lender, and pay a 6% interest rate over 2 years, then the total repayment cost is $85,095.
There’s no denying that $5K can be valuable working capital during the early years. But paying profit to your investor indefinitely can land you in a much more expensive situation, and it may not be possible to get out.
If you sell a 10% equity stake in your business, then you’ll owe 10% of your monthly earnings to your investor, unless you create a unique agreement. That might not be a lot at the moment. But if your cannabusiness reaches a point where you’re generating $1 million in annual revenue, then this short-term funding source can become a major burden.
Through alternative finance, you can qualify for better amounts, rates and terms than you’d otherwise have access to. Instead of following the demands of your investor, you can make decisions independently, based on your own aspirations. You can grow your own way!
Thanks to the speedy time-to-funding, you can pursue new opportunities that are active, without letting competitors get the edge on you and inch ahead.
National Specializes in Helping Cannabusinesses
As the leading alternative lender in the cannabis industry, National can help your cannabusiness reach the next milestone with ease.
We leverage our 75+ lender network to find you the best deal on any type of financing, based on your goals and aspirations.
After you submit an application, one of National’s knowledgeable Business Financing Advisors will work with you to learn about your story, and steer you in the right direction.
With help from National, you can grow your business knowing that you have the best financing possible!
National Business Capital & Services is the #1 FinTech marketplace offering small business financing and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.
Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.
We strengthen local communities one small business loan at a time.
For every deal we fund, we donate 10 meals to Feeding America!