Cannabis Lending 101: Where Can You Find Cannabis Capital?

Every business needs funding, especially in a capital intensive industry like cannabis. But the desire for funding doesn’t pave a straightforward road to securing any. Often cut off from traditional bank loans, it can be easy to feel like there’s nowhere to turn for funding. Thankfully, you aren’t without options — far from it. Let’s take a look at the cannabis lending space, why it’s so different from other lending in other industries, and how it might evolve.

Cannabis lending and its challenges

Loans have traditionally been hard to come by for cannabis businesses. Most banks are unwilling to offer loans or lines of credit because cannabis remains a federally-prohibited Schedule I substance under the U.S. Controlled Substances Act. That means any bank that lends to state-legal cannabis businesses could conceivably be considered as funding a criminal enterprise. Since banks are insured by the Federal Deposit Insurance Corporation (FDIC), they are beholden to federal law, and the risk of lending to a federally illegal industry is simply too great.

It’s worth noting that there is no law that explicitly prohibits banks from lending to state-legal cannabis businesses. It’s the concern that loans cannot be repaid. Marijuana related businesses (MRBs) like dispensaries cannot take advantage of bankruptcy protections, which can leave banks holding the bag if a borrower defaults. There is also some concern among FIs that they could lose their FDIC insurance if they lend to cannabis operators. Thankfully, there have been no reported instances of a bank losing its FDIC insurance for working with the cannabis industry, but in banking, the mantra is often “better safe than sorry.”

The result has been a dearth in funding opportunities, forcing cannabis businesses to rely on bootstrapping, borrowing from friends and family, or selling equity to private investors to secure capital. Debt financing options such as term loans and lines of credit have been few and far between, especially for plant-touching entities.

In the recent past, cannabis lending was the domain of wealthy individuals or credit lenders. Some credit lenders would engage in predatory practices like charging exorbitant interest rates, attach prepayment penalties, and short maturities. This rocky history has shaped a history of distrust between cannabis businesses and the financial industry.

How can cannabis businesses get a loan?

Fortunately for cannabis businesses, there are opportunities to secure term loans and lines of credit without the help of a bank or the predatory lenders of old. More reputable private lenders like family offices and investment funds have stepped in to fill the void and extend debt financing options to cash-strapped cannabis businesses. This capital is typically a bit more expensive than conventional bank loans would be and the qualification process is just as rigorous (if not more so), but for cannabis businesses in serious need of investment capital, they can be a saving grace all the same.

If you’re looking for capital, take the following steps to increase your chances of finding a lender that can support you.

1. Tap into your network

Talk to colleagues who may know reputable lenders in the space. Ask the professionals you work with, like your banker or attorney, to see who they know. Ask partners in the space who’ve successfully secured funding about who they worked with and what their experience was like. Gather the names of lenders that people you trust feel comfortable with or have heard positive things about to create a shortlist of candidates that you can further investigate on your own.

2. Shop around

Once you have a list of candidates, do your due diligence to determine which may be best for your cannabis business. Start by looking into each company online. How much information is available about each company? Are there satisfied customer reviews from borrowers that have worked with them? Can you find out about the ownership of the company and their track record?

After this initial phase of research, make contact with the lenders you’re considering working with. Let them know you’re interested in applying for financing and ask if you can set up an initial call to explore your options.

3. Determine a plan for the funding

Not every lender will ask you for a detailed plan for how you’ll use the funding; many will simply want to check your financials to ensure you can repay it. Even if they don’t ask for a plan for how you plan to use the proceeds, you should have a clear and detailed plan for how you intend to use the funding. This includes how you plan to spend the funding and the desired return on investment you expect to generate.

Having a plan will help ensure you use each dollar wisely and in a way that can support the growth of your business. Whether you need to acquire equipment or hire more staff, be clear about where the expenses are going and how it will help you drive new revenue.

In addition, work to establish a repayment plan you can follow to ensure your loan is paid back in accordance with the terms of the financing agreement. As a borrower, it is your responsibility to pay back loans in a timely manner, and failing to do so can be costly for both your business and your personal financial situation. Never take a loan without a clear plan to repay it.

4. Ask candidates about your financing options

Every private lender in cannabis is different. Some may offer products akin to a line of credit, for example, which gives cannabis businesses access to ongoing, revolving financing. Others may only offer term loans that resemble a more conventional business loan. There are other creative options out there on the market too, such as invoice factoring and merchant cash advances, though these may be somewhat more expensive options. Be sure to ask about the funding type, structures, and payment terms to get a handle on what’s best for your situation.

5. Review terms carefully

Much like financing options, the terms private lenders offer can vary considerably. Always review the terms a lender extends carefully before accepting a loan. It’s critical to make sure you clearly understand the terms surrounding the loan and that you know how you’ll repay it.

Take your time reviewing and making a decision. You may want to consult your attorney, accountant, or another financial professional to get your take on the terms. If a lender pushes you for a speedy response, it could be a red flag. Reputable lenders will understand that responsible borrowers may need some time to review all documents and make a wise decision.

Be on the lookout for lender-friendly terms, excessive fees and penalties, and other shady practices. Thoroughly vet any lending partner and verify that others have had positive experiences working with them before accepting financing of any kind.

Example of private lending for cannabis

One private lender that has extended helpful financing options to cannabis businesses is Green Check Connect marketplace partner FundCanna, a funding source solely dedicated to providing financing options to the cannabis industry. Adam Stettner, Founder and CEO of FundCanna, described the company as filling a void and giving cannabis entrepreneurs more options.
“The overwhelming majority of our clients have diluted equity or they’ve borrowed money from family members,” he said. “That’s stressful.” Instead of selling equity or leaning on friends and family, private lenders like FundCanna make debt financing possible for cannabis businesses so they don’t need to part with any ownership stake.

“Our funding functions like a line of credit,” Stettner said. “We don’t tell you what to do with the money — we want to know you have a plan, but we don’t place any restrictions on you.”

“Our clients come back and have shown growth because the funds we provide fuel their business. Our repayment structure was designed around the cannabis supply chain and puts the control of cost and duration in the hands of the operator. No other funding source can say that.”

FundCanna is one example of what you can expect when you approach a private lender, but other lenders may have unique requirements and financial products. For example, you may be required to put up personal collateral, such as your car or home. Some states even allow your license to be put up as collateral. Others may require invoice factoring, which is effectively the sale of your outstanding accounts receivable at a reduced amount.

What would it take to normalize cannabis lending?

While federal law does not technically prevent banks from lending to cannabis businesses, changes to federal law could still make a difference in improving access to funding. There are a number of reform proposals in Congress, including the Secure And Fair Enforcement Regulation (SAFER) Banking Act, which would prohibit federal banking regulators from penalizing banks for providing services to any state-legal cannabis business.

Changing the status of cannabis in the eyes of the federal government would also make a significant difference. As of February 2024, the U.S. Drug Enforcement Agency (DEA) is mulling a proposal from the U.S. Department of Health and Human Services (HHS) to reschedule cannabis as a Schedule III drug, which may encourage some banking institutions to open their doors to cannabis operators. Some members of Congress have pushed the executive branch to deschedule cannabis altogether. Descheduling would remove cannabis from the U.S. Controlled Substances Act altogether, opening the way for banks to confidently lend to the industry.

Others, including Senate Majority Leader Chuck Schumer (D-NY), have called for federal legalization of cannabis, which would set the stage for a federally regulated national cannabis market and full, unbridled access to the banking system. Still, should a legalization bill be passed and signed into law, it would likely take several years to set up a complete regulatory framework to provide banks clear guidance on lending rules. In the meantime, most states have some sort of state-legal cannabis program and a full industry to match — an industry that needs financial resources now.

Access to cannabis capital is improving and the future is bright

Although cannabis financing hasn’t always been easy to come by and many entrepreneurs have found themselves dealing with predatory lenders, the cannabis lending landscape is slowly but surely improving. With reputable private lenders like FundCanna and partners like Green Check who bridge the cannabis-finance gap to bring the two together, the cannabis industry is forging its own solutions despite the challenges.

Future federal reforms may serve to open the way even more, but there are already options to support your cannabis business today. The Green Check Marketplace is a resource for cannabis-friendly lending and other financial services trusted by more than 8,000 cannabis businesses. The companies in the Green Check Marketplace are ready, willing, and able to work with cannabis businesses like yours. Connect to our gateway and find the financial services your business needs to succeed.