Unless you own a cannabis corporation or multi-state operator, finding a loan for your dispensary is often the hardest aspect of getting started.
It’s often said that without SAFE Banking or federal legalization, cannabis entrepreneurs are left to their own devices when it comes to working with a bank.
While it’s much harder to get a loan in cannabis, it’s not impossible.
Here’s what it will take to secure money for your dispensary.
What’s different about cannabis loans?
Cannabis is in a unique position when it comes to lending. There are very few banks that will work with dispensaries which leaves only private lenders which can also be in short supply.
Interest rates are also generally higher and the collateral requirements are usually greater than other industries.
This isn’t necessarily because of federal law, but rather basic supply and demand. With fewer capital providers, there isn’t as much downward price pressure.
While dispensaries do not have the same options as a more traditional retailer, that doesn’t mean it’s impossible to find a loan.
There are new cannabis financing options entering the market every month — you just have to know where to look.
Common types of loans
There are many types of loans depending on your marijuana dispensary's current business needs and the type of cannabis business you have. Below are some of the most common loans that a cannabis business may apply for.
Inventory financing
Inventory financing refers to a short-term loan or revolving line of credit. This financing solution is used by cannabis companies to acquire products to sell at a later date.
This method of funding is useful for dispensaries that need to pay suppliers for a stock of inventory that will be warehoused for use on demand.
This financing is collateralized by the inventory it is meant to purchase.
For newer businesses — or dispensaries currently in debt — this method may create additional stress due to increased debt.
An example of industry financing options in cannabis is Leaflink Financial.
Working capital line of credit
A working capital line of credit is used by businesses to cover operating costs such as inventory, payroll, and rent.
This line of credit allows owners to borrow up to a certain limit and the funds must be paid back within a specified time frame.
With a line of credit, you only have to pay back the amount you actually use - similar to a credit card.
You can draw from the line of credit as needed and repay the amount with interest within the specified time frame.
For dispensaries with cash flow gaps or a more seasonal sales cycle, this option can prove especially helpful.
Term loan
A term loan provides cannabis business borrowers with a lump sum of money upfront in exchange for specific borrowing terms.
Borrowers will agree to repay their loan (with interest) within a certain amount of time and often pay a down payment upfront to reduce the total cost of the loan.
Term loans are useful for established small cannabis businesses in need of additional cash for things like expansions.
Merchant cash advance
A merchant cash advance is an alternative to traditional bank loans – specifically for small businesses. The business owner receives a lump sum of funds upfront from a cash advance provider.
This sum is then repaid by the business with a percentage of the business’ sales.
These loans are easily accessible, flexible, and don’t require strong credit or collateral.
However, merchant cash advances are very expensive and can conflict with business operations.
Some providers include a lien on your operating license when working with cannabis. Be wary of such providers as the consequences on your business operations may not worth the risk.
Popular cannabis business funding options
While traditional loans are more accessible for traditional retailers, dispensaries regularly have to get creative since banks are wary to work with cannabis. Below are some popular funding options that dispensaries consistently use to fund their businesses.
Option 1: Work with a partner
Green Check, Abaca, Safe Harbor, and similar companies provide cannabis banking solutions and expert advisory services for financial institutions.
They facilitate trusting relationships between financial institutions and legal cannabis business owners to fuel your business growth while minimizing the time, cost and risk required to maintain compliance.
If you’re a newer dispensary, or have exhausted other financing options, find a partner that specializes in cannabis banking relationships to help you get your loan.
Option 2: Do your own research
You can also research on your own to find a bank to fill your dispensary bank account (that may be what you’re doing right now). There is a lot of information available online to find banks and credit unions that work with cannabis, you just have to know where to look.
Some useful websites for cannabis funding options:
Even if you don’t find your small business loan online, you will certainly find useful information to help once you begin the application process.
The reality is, finding a bank that offers loans to dispensaries does not mean you are guaranteed funding – you have to be prepared to present your business and case for a loan.
Option 3: Apply for social equity lending
If you qualify, social equity lending programs are an excellent asset for businesses that need additional help. Finding the right program means searching the depths of the internet – some of the best loan programs can be hard to find.
Find Social Equity Programs!
The Complete Guide to Social Equity Programs for Dispensaries
If you can secure a social equity line of credit, you’ll often enjoy lower interest rates and even zero-interest loans.
Option 4: Look to friends and family
Many dispensary borrowers find that those closest to them can provide the financial means necessary to get their dispensary off the ground.
Many businesses get their start with the help of those around them who already want to see them succeed.
Reach out to your friends or family and present them with your business plan. Be sure to treat friends and family the same way you would any financial institution – be professional, prepare accordingly, and understand that loans come with risks.
Frequently asked dispensary loan questions
Is it hard to get a first-time dispensary loan?
Start-up business financing can be more difficult to secure as opposed to working capital loans. This is because brand new businesses don't have the same track record as established ones, which is a large part of the credit underwriting process. Without this operating history, new start-ups should look to highlight operating history in other markets.
How can I avoid predatory lending with my dispensary loan?
To avoid predatory lending (a lending practice that imposes unfair and abusive loan terms), read the fine print before signing anything. You should also avoid taking a loan out of desperation. Make sure you’re operating with the proper business knowledge to be thorough in your search and selection process. You must also conduct due diligence on your lender (ask to see an example term sheet, ask for references, conduct your own research) before making a decision.
How can I improve my chances of finding a cannabis business loan?
You can improve your chances of receiving a marijuana business loan by clearly defining your ask. Determine what kind of loan you’re looking for, at what amount, and what type of rates you’d be comfortable with.
Be prepared to answer questions and provide details regarding credit score worthiness such as:
Sales histories
Sales projections
Personal assets
Bank statements
Business assets
It’s especially important to understand that you are presenting a viable business – be confident! Cannabis does not carry the same stigma as a few years ago. Be upfront from the start that you are looking for funding for a cannabis business. If you lie about what you need money for, you will eventually be caught and face penalties.
Can dispensaries use banks?
Yes! Dispensaries can have bank accounts, they can deposit money in the bank, and they can pay bills electronically. It just looks a bit differently than other industries.
Good luck securing a business loan for your cannabis dispensary!
