There are multiple ways you can finance your cannabis-based business.
What’s in this guide?
Compare top cannabis business loan providers
What types of financing are available for cannabis businesses?
While you won’t be able to walk into a bank with a business plan and be approved for financing, you still have options.
- Business loans from alternative financing companies. Some lenders like Diamond Business Loans specialized in cannabis businesses and work to meet their unique needs. You can get a standard term loan from these lenders to pay for large, one-time expenses.
- Business lines of credit. Alternative financing companies also offer lines of credit to help cannabis businesses cover ongoing expenses.
- Real estate loans. These secured loans can be used to buy or refinance the buildings or raw land you need to run your business.
- Equipment leases and loans. Also available through alternative financing companies, cannabis businesses can use this loan to to pay for hardware, software, vehicles and more.
- Crowdfunding. The US Securities and Exchange Commission (SEC) allows anyone to invest $2,000 in small companies in exchange for a stake in the business. Companies can raise up to $1 million this way. Fundanna is an equity crowdfunding platform that specializes in cannabis businesses.
- Private equity firms. Financial firms may be willing to offer short-term high-interest loans or funding for a large stake in your company.
- Venture capitalists. In nearly all industries, you’ll find wealthy investors interested in helping small businesses grow, often in exchange for equity.
- Angel investors. Similar to venture capitalists, angel investors help businesses get started and typically deal with smaller amounts of money.
- Personal loans. Got a solid credit history? You might have better luck getting approved for a personal loan, which you can use to start or fund your cannabis business.
- Home equity loans. Homeowners can also borrow against the value of their houses with a home equity loan or line of credit.
Why can’t I get business financing from my local bank?
Although cannabis products are legal in many states, it is still prohibited to buy, sell or use them on a federal level. The FDIC considers any bank willing to work with a cannabis-based business as taking on an existential risk with potentially negative consequences to the public and in violation of federal law.
Because marijuana is considered a Schedule I drug by the US Drug Enforcement Agency (DEA), banks choosing to provide loans to businesses associated with the drug could be subject to prosecution. They could also be liable if they lend to a business that breaks state law by selling to a minor or transporting cannabis across state lines.
These risks make it impossible for you to get a business loan from an FDIC-insured bank and puts your business at risk of federal government shutdown.
What is a Schedule I drug?
The DEA classifies drugs, substances and chemicals into one of five distinct categories — or “schedules” — according to a drug’s accepted medical use and potential for abuse or dependency.
A Schedule I drug is considered to have no accepted medical use and a high potential for abuse. Examples of Schedule I drugs include heroin, ecstasy and marijuana. A 2017 bipartisan bill intends to demote marijuana from Schedule I to Schedule III; however, as of August 2018, the bill has yet to be up for vote.
Is my cannabis-based business eligible for a loan?
Although loans for your cannabis-based businesses typically won’t involve a bank, your company will still required to meet specific criteria when you apply. Private equity firms, venture capitalists and other investors will likely need to be sure they have a good chance of getting a return on their money.
For these investors you must generally:
- Be a business in operation for at least six months.
- Be incorporated as an LLC, limited company or S corporation.
- Have a personal credit score of at least 500.
- Have no criminal record and able to pass a background check.
- Have gross monthly sales of at least $10,000. If you’re a startup, have a solid business plan.
- Have a business bank account.
Depending on the source or platform you’re using, crowdfunding will require generating enough interest and providing incentives for people to fund your business over others competing for funding.
Can lenders tell if I lie on my application?
It might be tempting to pretend you’re in another, less complicated industry. But lenders have ways of making sure that you’re telling the truth. For example, some lenders require an on-site visit before you can get approved for a loan. Others use anti-money laundering or fraud-detection software to weed out cannabis companies.
They also look out for tell-tale signs of cannabis businesses. Low or unusual bank balances for a business of your size and lots of cash transactions can also set off alarm bells. Lenders might be particularly suspicious of your application if they see multiple $9,500 deposits — deposits over $10,000 get reported.
What can I use a cannabis business loan for?
Cannabis business loans are a lot like other loans: You can use them to cover almost any cost related to your business — as long as it’s legal in your state. Here are some common expenses cannabis businesses can use a business loan to cover:
- Cannabis business license fees. Starting a new business? You’ll need to get a business license to register your business with local authorities. You may also need to get a state tax license. These costs as much as $78,000 a year, depending on what type of business you’re planning on starting.
- Growhouse costs. Setting up and maintaining a growhouse is expensive — you have to have a strong grip on the indoor climate to get the best product. According to Marijuana Business Daily, starting an indoor growhouse can cost $75 per square foot.
- Dispensary costs. Running a dispensary can come with daily recurring costs that your business might not be able to afford when it’s just starting out — and might benefit from opening a line of credit.
- Hiring new staff. Bringing new people on board can up productivity and future revenue — but you’ll need to be able to pay their salaries first.
- Paying for equipment. Many cannabis business lenders offer options for leasing or buying new equipment that you need to keep things running smoothly.
- Utilities. Growhouses especially might want to consider taking out a line of credit or business loan to cover those high electricity costs.
- Rent, land or real estate costs. You’ll need a place for your business to operate. A cannabis business loan can help you rent, buy your first piece of real estate or expand your current operation.
Cannabis business loan costs
Like any business loan, there are generally two main costs you need to pay attention to when comparing cannabis business loans: Interest and fees.
- Interest. Lenders charge a percentage of the amount you owe each month, which they then add to the amount you repay. For cannabis businesses, interest rates typically start as low as around 5% and go up to 20% or higher.
- Fees. Cannabis loans in particular tend to come with fees involved in taking out the loan. The most common is an origination fee. Lender usually charge between 0% to 10% and often deduct it from the amount you borrow.
Lenders often express your loan’s interest and fees in one percentage called the annual percentage rate (APR). If a loan doesn’t come with any fees, the APR and interest rate are the same. If it does, the APR will be higher to reflect those additional costs.
How safe are loans for cannabis businesses?
Safety can vary by the type of funding you pursue. Because you’re typically accepting funding from nontraditional sources for a business that could potentially be shut down by the federal government, you’ll want to be careful about how you proceed.
Venture capitalists, private equity firms and even individual sources are taking a financial and personal risk by providing funding to cannabis-based businesses. These funders may be experienced in dealing with business owners who got their start working in a highly regulated industry and as a result could have their own way of doing business to safeguard their interests.
To protect your business, you may want to draw up a contract that is strict in its interpretation and specifically worded to avoid any misunderstandings that can be used against you in court. If you’re not skilled or experienced in contract negotiations, consider hiring an attorney to carefully look over your loan contract before you and all involved parties sign it.
The federal government tolerates marijuana businesses in states where it’s legal but could potentially shut down shops and any other businesses at any time until marijuana is no longer classified as a federal Schedule I drug.
If you’re giving up equity, a good attorney can help you write a solid contract that is mutually beneficial for your business and your investors. This could protect your total personal investments if your business experiences hardships.
Crowdfunding for cannabis businesses
In mid-May of 2016, the Securities Exchange Commission (SEC) passed regulations on how cannabis crowdfunding functions. Before, you had to be a rather wealthy individual to invest in cannabis.
Under the new regulations, you can invest $2,000 per year as long as you receive stock in the company. A wealthy individual gets that limit raised to $100,000. It should be noted that this limit is on an accumulative basis and not per company invested in.
The other part of the regulation allows small cannabis business to receive up to $1,000,000 in crowdfunding each year through the method. It can require extensive filing with the SEC depending on how much you raise, and a bank account specifically for the funds received.
Equity crowdfunding vs. regular crowdfunding
You might associate a website like Kickstarter with crowdfunding, but this model isn’t quite the same as equity crowdfunding. Kickstarter is a platform where backers get some form of reward, like a free product or early access to a service, for their contributions.
On the other hand, equity crowdfunding gives backers a piece of the company. In this way, backers become investors. Both regular and equity crowdfunding are legal. The latter is highly regulated by the SEC, and the former requires some careful planning when it comes to rewards to abide state laws.
Which should you use? It depends on your business plan and what you’re willing to give. When it comes to donation-based backing you’re building a potential customer base instead of gaining investors. You should also consider that regular crowdfunding requires reward tiers while equity relies on giving up a portion of your business.
Cannabis funding from an investor
Crowdfunding might be a good option for getting seed money for a new cannabis business. But once it matures, you might want to look into other investment opportunities. Cannabis-focused hedge funds like Poseidon Asset Management and Navy Capital pool money from interested investors to fund your business. Other investment sources include family offices, angel investors and venture firms.
Typically, you’ll need to provide more documentation than a business loan and how long it takes to get your funds can be unpredictable. Be prepared to submit a business plan, pitch deck, financial projections and more. It also helps if you can present your pitch in a video or other form of media that’s easy for investors to quickly go over.
Top investment institutions for cannabis businesses
|Name||Type||How to get started|
|Ackrell Capital||Investment bank||Contact Ackrell Capital by either calling (415) 995-2000 or filling out a short form expressing interest on its website.|
|Benchmark Capital||Venture firm||Visit or send a note to one of its two offices: 988 Market Street in San Francisco, California or 2965 Woodside Road in Woodside, California. You can also get more information by contacting the Twitter handle @benchmark.|
|Canna Angels||Angel investor connection service||Submit an application with your executive summary, pitch deck, a fact sheet and a video along with an application and a $185 application fee to get connected with an angel investor.|
|Cassa Verde Capital||Venture firm||You can reach out to this firm (founded by Snoop Dog in 2015) by filling out an online form expressing interest on its website.|
|Poseidon Asset Management||Hedge fund||Fill out a quick form on its website with your contact information, a short description of your company, a profile of you and your co-owners business expertise and how much funds you’re looking for.|
|Navy Capital||Hedge fund||Fill out a quick online form with your contact information and a brief message or call (646) 521-8748.|
Friend and family loans
Don’t want to sell equity? Your friends and family can also invest in your business by personally lending you the funds and collecting on interest. You can work out a contract on your own or use a resource like loanable, which helps you draw up a legally binding contract for loans from your social circle.
Is marijuana legal in my state?
Marijuana regulations by state
Many states have legalized marijuana in some form for medicinal purposes, recreational purposes and cultivation. However, federal law still classifies marijuana as a Schedule I drug, which complicates the ability for you to get a business loan for a cannabis-based business.
As of August 2018, marijuana is legal in some form in 30 states and the District of Columbia.
|State||Possession limit||Plant limit||Recreational|
|Alaska||1 oz||3 mature, 3 immature||Yes|
|Arizona||2.5 oz||12 plants||No|
|Arkansas||3 oz per 14 days||N/A||No|
|California||8 oz||6 mature, 12 immature||Yes|
|Colorado||2 oz||3 mature, 3 immature||Yes|
|Hawaii||4 oz||7 plants||No|
|Illinois||2.5 oz per 14 days||N/A||No|
|Maine||2.5 oz||6 plants||Yes|
|Maryland||30-day supply, TBD||N/A||No|
|Massachusetts||60-day supply, 10 oz||N/A||Yes|
|Michigan||30-day supply, 10 oz||N/A||Yes|
|Montana||1 oz||4 plants, 12 seedlings||No|
|Nevada||2.5 oz||12 plants||Yes|
|New Hampshire||2 oz per 10 days||N/A||No|
|New Jersey||2 oz||N/A||No|
|New Mexico||6 oz||N/A||No|
|New York||30-day, nonsmokable||N/A||No|
|North Dakota||3 oz per 14 days||N/A||No|
|Ohio||90-day supply TBD||N/A||No|
|Oregon||24 oz||6 mature, 18 immature||Yes|
|Rhode Island||2.5 oz||12 plants||No|
|Vermont||2 oz||2 mature, 7 immature||No|
|Washington||8 oz||6 plants||Yes|
|Washington, DC||2 oz dried||N/A||Yes|
|West Virginia||30-day supply TBD||N/A||Yes|
How to start a marijuana dispensary
Opening a dispensary is not as easy as growing some plants and setting up shop. However, if you’re willing to put in some work and deal with some red tape, there is money to be made.
- Understand your state’s laws. Research whether your state allows recreational use, how much marijuana it allows a person to have, how many plants you’re allowed to grow and any other parameters state residents are required to follow. Look into laws expected to be enacted in the future.
- Make sure you’re eligible. In addition to your lender’s eligibility criteria, you and your investors may need to pass a background check before proceeding with funding.
- Research any tax laws. Even though marijuana isn’t legal according to federal law, you are still required to pay taxes on money earned. This could require accepting and making payments in cash only to steer clear of possible federal money laundering charges.
- Find a compliant rental space. Look into zoning laws that could affect where you can open a dispensary. You’ll typically find that you cannot open a cannabis-based business near a school, park or church.
- Create a business plan. A good business plan sets you apart from other businesses seeking similar funding and determines your budget and future pricing.
- Get a license. Licensing for your dispensary will vary depending on your state’s laws and can be expensive to pursue.
- Get good product. Before cultivating your own product, you may need to buy from other growers. Carefully review how to stay 100% compliant with your state’s laws when purchasing supplies.
- Market your business. As a startup business, consider offering deals for first-time customers, buying advertising in industry publications and on relevant sites and seek publicity in periodicals and blogs.
How to cover your dispensary’s startup costs
Startup financing is hard enough to get if you’re part of a relatively low-risk industry. Fortunately, cannabis is such a new industry that it’s slightly easier to find marijuana-friendly lenders that also work with startups. Lenders like Diamond Business Loans care more about your personal credit history than your business’s — after all most cannabis businesses are unbanked.
If you have strong personal credit, you might also want to consider taking out a personal loan to cover startup costs. Own a home? A home equity line of credit can also help you fund your startup costs. These can be a bit risky since you’ll be on the hook for paying it back, even if your business fails. But you won’t need to have a business bank account and meet the usual business loan requirements to qualify.
Can’t get either? Investors and crowdfunding sites might your best bet. With these options you might want to pay extra attention to your business plan and pitch deck if you’re going for one of these options — that’s what your investors will focus on the most when making their decision.
Getting a cannabis business loan in California
With a $2.7 trillion GDP, California is one of the largest economies where recreational cannabis is legal in the world. But that doesn’t mean getting a loan is always easy. Only around 150 financial institutions are willing to work with cannabis businesses. And like other states where recreational cannabis is legal, these institutions can stop being cannabis-friendly at a moment’s notice.
While the newly-founded California Bureau of Cannabis Control (BCC) and the Department of Business Oversight (DBO) are responsible for regulating the industry, it doesn’t have any specific rules for cannabis business loans. But a lot of cannabis-friendly lenders and investors are based in the the golden state, meaning that it might be easier to secure funding than businesses located in other states.
To make sure you’re working with a legit lender when borrowing in California, make sure it’s registered with the DBO before you apply. Many display their licenses on their websites. If not, you can check it’s status by filling out a quick form on the DBO’s website.
While you may likely find it difficult to secure funding for your cannabis-based business, you have several alternatives to bank loans that could help you start up or expand your services. Some options offer term loans with fixed interest while others could be looking to own equity in your company.
Be sure to compare the funding options available to find one that’s most beneficial for you and complies with all applicable laws.