Federal regulations make it difficult to find a loan from most lenders if you’re in the cannabis industry — at least for now. It’s still possible to find funding, though you’ll generally need good credit, which is typically a credit score of 670 or higher.
First Down Funding is an alternative business loan provider that offers fee-based financing with a low minimum credit score of 400. Its rates are lower than what you'll find with most alternative lenders. But it's not ideal for starting a cannabis business. It requires at least $300,000 in annual revenue, and your business must be established for at least two years to qualify for a loan.
This California-based lender specializes in working with businesses that have struggled to find funding elsewhere — and it has a special program specifically for cannabis companies. Its rates are competitive compared to other cannabis business loans, starting at just 5.9%. The application is mainly based on your financial history, so look elsewhere if you have fair or bad credit.
United Capital Source is an alternative lender that offers a wide range of financing to businesses in high-risk industries, including the cannabis industry. It requires little documentation, and you might be able to qualify for a loan even if you have bad credit. However, you'll likely need to provide bank statements, so you might not get approved if you're unbanked.
This service can help your business connect with a bank or lender that's willing to work with cannabis companies. Its partners offer relatively low rates on working capital loans, though you need good credit to qualify. But you'll have to reach out for more info — there's very little available on Green Leaf Money's website.
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How we picked these lenders
We picked these lenders based on cost, availability and the ability to fund most types of cannabis businesses. Since no one loan is best for every business, we made sure to include lenders that offered different types of funding to fit a variety of business needs.
Types of cannabis business loans
There are several different types of loans that you can use to fund your cannabis business. Which one is right for you depends on what you need financing for.
Working capital loans cover overhead costs like payroll and inventory when your business doesn’t have enough regular revenue.
Merchant cash advances give dispensaries and other consumer-facing businesses an advance on future sales, which you repay plus a fixed fee.
Invoice factoring allows growers and other business-facing companies to sell unpaid invoices at a discount to factoring companies. These usually come with a fee based on how long it takes for your clients to fill their invoices.
Purchase order financingfronts you money to fill orders from customers. Like with factoring, you repay it plus a fee when your customers pay for the order.
No, cannabis businesses currently are ineligible for loans backed by the Small Business Administration, or SBA loans. This includes all types of federally funded coronavirus assistance. That’s because the SBA doesn’t offer loans to businesses that engage in illegal activity. Unless the SBA makes an exception, these low-cost loans are off the table for the cannabis industry until cannabis is legalized on the federal level.
Compare financing options for your cannabis business
Business financing is a little different when it comes to the cannabis industry. Since many cannabis businesses don’t have financial business records your eligibility often heavily depends on your personal financial history. Here’s what you generally need to qualify:
Good personal credit. Generally, you’ll need a credit score of 670 or higher to qualify for a good deal on a cannabis business loan.
Long credit history. The length of your credit history can also affect your application. Typically, you’ll need at least three years.
No bankruptcies. You usually can’t have bankruptcies or other negative marks like tax liens or foreclosures on your credit report.
Business bank account. While not always required, you often need to have a bank account for your cannabis business.
Minimum time in business. Lenders typically require you to be up and running for at least six months to a year.
Legal status. Generally, all business owners need to be US citizens or permanent residents to qualify.
You’ll likely have to apply with alternative, nonbank lenders. Banks that have a national charter or FDIC insurance generally won’t work with cannabis because it’s illegal on a federal level. They risk losing their licenses if they take you on as a client.
Can lenders tell if I lie on my application?
Probably — most lenders have ways to verify the information on your application is correct and that you’re in an eligible industry.
Some use anti-money laundering or fraud-detection software to weed out cannabis companies. And others look out for suspicious signs in your bank account, like regular deposits just under $10,000. You’re better off applying with a cannabis-friendly lender if you’re trying to get a business loan.
Why can’t I get business financing from my local bank?
Most banks don’t offer cannabis financing because it’s highly risky. Cannabis is still federally illegal, so banks that offer loans to the cannabis industry 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 transports cannabis across state lines.
These risks make it impossible for you to get a business loan from an FDIC-insured bank and hard to find funding even from non-insured banks or lenders.
The SAFE Banking Act change how banks treat cannabis businesses
If passed, the Secure and Fair Enforcement Banking Act of 2021, or SAFE Banking Act would allow banks to offer loans and other banking services to the cannabis industry. It would prevent the federal government from penalizing banks that offer financial services to the cannabis industry. And it would also prevent banks from closing accounts based on the risk of lending to cannabis businesses alone.
The SAFE Act passed Congress on April 19, 2021 and is awaiting Senate approval.
What can I use a cannabis business loan for?
Like other business loans, cannabis business loans are restricted to business use. You can’t use a cannabis business loan to buy a car that is primarily for personal use, for example.
You also generally need to use your loan for the use you mentioned in the application. If you want to buy property or a storefront, you can’t use a working capital loan — you’ll have to apply for a real estate loan.
Cannabis business loan costs
How much your loan costs depends on the type of loan you apply for. Your cannabis business loan might come with the following types of costs:
Interest. Term loans generally come with an interest rate, usually starting around 6% for cannabis businesses.
Origination fee. Most business loans come with a fee that you pay at closing, which can run as high as 10% for the cannabis industry.
Factor rate. If you’re taking out a merchant cash advance, you’ll likely pay a factor rate instead of interest, which usually starts at around 1.09.
Down payment. If you’re buying equipment or real estate, you might have to pay around 30% upfront as a cannabis business.
How safe are loans for cannabis businesses?
Cannabis business loans can be riskier than options available to other industries. Like other businesses in the cannabis industry, cannabis lenders don’t face as many regulations, so it’s possible to run into scams. Do a little detective work before applying with a lender:
Check if it’s registered. Look up its registration with the agency that regulates lenders, like a Department of Business Oversight — if it’s a requirement in your state.
Read reviews. Find out what other other borrowers have to say about their experience and look for red flags.
Check where it’s been active. Check if the lender has participated in any industry events, like conventions.
Reach out to other cannabis businesses. If you’re not sure where to start, ask other businesses in your area about where they found financing.
Is marijuana legal in my state?
While cannabis is illegal federally, it’s legal in many states for medical or recreational use. Laws and regulations frequently change, so the best way to make sure your business is acting legally is to check with the state itself.Typically you can find rules for cannabis and CBD businesses, like licensing requirements, through the agency that regulates your business. Some states might also have a separate agency that regulates cannabis consumption.
In New York? Here’s what to know first for both consumers and startups
New York State legalized recreational cannabis on March 31, 2021. Consumers can now possess up to three ounces of cannabis and up to 24 ounces of wax, oil and other THC concentrates for recreational purposes.
However, other parts of the law will be rolling out over the next few months — including the creation of a new state agency to regulate cannabis use. While it’s safe to start planning a New York cannabis business, you’ll have to wait for financing and state guidance to become available.
But a lot of cannabis-friendly lenders are based in the Golden State, and it might be easier to find a loan here than in other states. California is one of the few states that requires lenders to be licensed. If you can’t find a lender’s licence on its website, check its status by filling out a quick form on the California DBO website.
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 the extra work and deal with some red tape, there is money to be made.
Understand your state’s laws. Research both current laws and regulations 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.
Prepare for taxes. Consult a tax attorney to learn the best way to accept and make payments in accordance with federal and state laws.
Find a legal rental space. Look into zoning laws that could affect where you can open a dispensary. Often, you can’t 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.
Find good products. 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. Consider offering deals for first-time customers, buying advertising in industry publications and on relevant sites, and seeking publicity in periodicals and blogs.
Since cannabis business loans are generally dependent on the owner’s personal finances, it might be easier to find a startup loan than businesses in other industries. But you still might not get the best rates without a track record — or if your credit is less than perfect.
You might also want to consider other options, like equity investments or a personal loan. If you take out a personal loan, make sure the lender doesn’t have restrictions on using the funds for federally illegal activity.
What are some alternatives to cannabis business loans?
If your cannabis business doesn’t qualify with an online lender, there are other creative ways to seek out funding:
Crowdfunding. The US Securities and Exchange Commission (SEC) allows anyone to invest up to $2,200 in small companies in exchange for a stake in the business. Companies can raise up to $1.07 million this way — and one way to do it all in one place is through crowdfunding.
Business lines of credit. Alternative financing companies also offer lines of credit to help cannabis businesses cover ongoing expenses, though it’s often more expensive than a loan.
Real estate loans. You can use these loans to buy or refinance the buildings or raw land you need to run your business.
Private equity funding. Some private equity 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.
Friend and family loans. Your friends and family can also invest in your business by personally lending you the funds and collecting on interest. Bring on a lawyer to help you write a legally binding contract to hold everyone accountable.
If you have good credit, cannabis business loans can be an affordable financing option if you’d rather retain full ownership of your business. But since it’s such a high risk for lenders, you’ll likely pay higher rates and fees than other industries.
Get the answers to common questions about financing a cannabis business.
Can I get a medical marijuana business loan if recreational cannabis isn’t legal in my state? You can, though you might have a more difficult time finding a traditional business loan locally. You might want to look to lenders working out of states where recreational marijuana is legal or crowdfunding platforms to connect you with investors.
If you’re just starting a medical marijuana business, you’ll also need to confirm with your local authorities that everything is legal before you get started.
Are these same options available to CBD businesses? In general, yes. Most lenders that are willing to work with businesses in the cannabis industry are also open to CBD businesses. You can learn more about your financing options with our guide to CBD business loans.
What is a Schedule I drug? A Schedule I drug is a Drug Enforcement Administration (DEA) classification for drugs the federal government considers to have no accepted medical use and a high potential for abuse. Despite the fact that many states have laws that allow medical and recreational use of cannabis, it’s still considered a Schedule I substance, along with heroin and ecstasy.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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