Cannabis Business Loans
Despite legislation that has made both medicinal and recreational marijuana use legal in many states, federally, cannabis still remains a Schedule I controlled substance. For this reason, many financial institutions that offer funding for entrepreneurs and investors are not willing to risk loaning money to borrowers who intended to use the financing for anything related to cannabis; dispensaries that sell cannabis products or agriculture producers that plan on growing marijuana, for example.
Financing for cannabis-related business is available, however. Many private lenders and venture capital firms are offering cannabis business loans. As cannabis use continues to grow and more investors and entrepreneurs are realizing there are ample business opportunities in the market, private lenders and venture capital firms are also realizing the increased opportunities for offering financing in this segment.
What are Cannabis Business Loans?
Cannabis business loans, as the name implies are loans that are specifically designed to provide financing for cannabis-related businesses, such as dispensaries and cultivation. The majority of these loans, as mentioned, are offered by private lenders and venture capitalists. These entities offer short-term business loans to individuals who are interested in launching businesses that are related to the cannabis industry.
There are two main options for cannabis business loans; debt financing and equity financing:
- Debt financing. With debt financing, investors and entrepreneurs sell assets to the financer, such as bonds or notes, to acquire working capital that they can use to pay for the daily operations of their business venture. Borrowers must repay the creditor within a specific amount of time, and repayment includes the principal of the loan, as well as interest. Usually, debt financing offers short-term loans, meaning that the money borrowed must be repaid in a short period of time; additionally, the interest rates on these types of loans are usually high.
- Equity financing. With equity financing, business owners borrow capital by selling shares of their business to lenders. Usually, shares of the business are sold as common stock, and the lender that purchases the shares becomes a share-holder of the company; they own a percentage of the company. Borrowers are not obligated to repay the money they secure through debt financing, as the lender owns stock in the company and therefore earns dividends of the business and will eventually sell the shares acquired for a profit. Additionally, lenders obtain voting rights and can vote on matters that concern the company.
Which Type of Funding Should You Choose?
The type of funding you should choose for your cannabis business loan depends on your specific needs and unique circumstances. For example, if you are OK with shareholders owning a percentage of your business and possibly making decisions, equity financing may be the right choice for you. The primary benefit of this type of financing is that you do not have to repay the capital that you receive from your loan, but rather the lender receives repayment through your business’ dividends. If, however, you would rather remain the sole proprietor of your cannabis-based business, then debt financing may be a better option for you. While you will have to repay both the principal balance of the loan, as well as interest (and interest rates can be high), and usually, payment must be made in a short period of time, with debt financing, you do not relinquish control of your business to your lenders; rather, you retain complete ownership of the company. However, it should be noted that if you forfeit on a debt financed cannabis business loan, the lender can take action and go after your business in an attempt to recoup the money they lost.
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