Why Equipment Financing is a Great Choice for Cannabis Businesses

It’s an unfortunate fact: loans can be hard to come by for cannabis businesses. While difficult, finding funding from a traditional financial institution is not impossible. Equipment financing is one of the loan types that cannabis companies are more likely to find willing partners to fund. 

This guide will explore equipment financing, how it works, and why it’s particularly well-suited for the cannabis industry. 

What is equipment financing and how does it work?

Equipment financing is a type of funding available to businesses that need to purchase equipment or machinery. These loans cover most or all of the cost of equipment that a business needs to operate. It’s especially useful for new or pre-revenue businesses that cannot absorb the full cost of the necessary machinery upfront.

Here’s how equipment financing works:

• Collateral: In equipment financing, the equipment itself acts as collateral, so if the borrower defaults on the loan, the lender can simply repossess the equipment to cover the loan. 
• Repayment terms: Like other types of loans, equipment financing comes with pre-determined repayment terms. Typically, these loans are repaid in one to five years, though the precise term will depend on the details of the loan agreement. It’s possible to negotiate longer repayment terms with some lenders. 
• Interest rates: Equipment financing interest rates can vary significantly depending on factors like the business’s industry, the company’s financial history, how long it’s been in operation, the business’s or owner’s credit rating, and the loan term. Expect anywhere from 5% to 30% interest rates for equipment financing.
• Down payments: Some lenders may also require a down payment, especially for equipment financing loans that cover the full cost of the equipment. Down payments may cost up to 20% of the total value of the equipment. 

Generally, once the loan is repaid, the business owns the equipment outright. This makes equipment financing a powerful way for businesses to protect their cash flow while getting off the ground. Maintenance costs and repairs are usually the business’s responsibility, even before the loan is fully paid off, so it’s important to factor these costs into your budget along the way. 

Ways equipment financing can be used in the cannabis industry

• Cultivation: Grow lights, fertigation systems, climate controls, generators, and rack systems are just some of the equipment necessary to get cultivation operations off the ground. This equipment is not unique to the cannabis industry and can be sold to and used by many other types of agricultural businesses.
  
• Manufacturing: Mixers, freeze dryers, chillers, and vacuum ovens are used in cannabis manufacturing facilities and in many other industries, like food and beverage production.
  
• Laboratory testing: From building work stations to compliant storage cabinets, laboratories have significant startup costs that can benefit greatly from an equipment loan. From the lender’s perspective, a lab may be a good candidate for a loan because the equipment can be sold outside the cannabis industry in the event of default.

Why equipment financing is good for cannabis businesses

Equipment financing is especially useful in the cannabis industry because it is often difficult for lenders to collateralize a loan to cannabis businesses. This is largely because it is illegal for lenders to sell cannabis products without a license, which means they can’t repossess a cannabis business’s inventory and sell it to cover the loan should a borrower default. Similarly, the license itself is not appealing collateral because there is a much smaller market for buyers, making it less likely that the financial institution can recoup its losses. 

Oftentimes, lenders collateralize cannabis loans with real estate, but there are limitations to this approach as well. Cannabis real estate tends to be highly specialized and built out for specific uses like cultivation, manufacturing, or cannabis retail. This makes it difficult to resell should a borrower default on their loan because it limits the pool of likely buyers. 

Equipment financing, though, offers a better option altogether for both lender and borrower. In equipment financing, the equipment itself is the collateral. If a borrower fails to repay their loan, the lender can simply repossess the equipment. For lenders, this equipment is more easily sold to recoup the costs of the loan than highly-specialized real estate. For borrowers, it means easier approval for financing because lenders are more confident in their ability to liquidate the collateral. 

Equipment financing for cannabis example

A manufacturer who produces cannabis concentrates and extracts needs a lot of expensive equipment, such as closed-loop extraction systems. For industrial-scale production, just one of these machines can easily exceed $100,000. Costs add up quickly, especially if the manufacturer is pre-revenue.

Let’s say a manufacturer secures $500,000 on a five-year equipment financing loan with an interest rate of 10%. Assume, for the sake of simplicity, there is no down payment required and the payments are fixed. The manufacturer’s monthly payment would be $10,623.52 for the life of the loan, resulting in a total of $637,411.20 across 60 payments. 

Since the equipment itself is the collateral, if the manufacturer fails to repay the loan, the financial institution can repossess the closed-loop extraction systems bought using the loan proceeds. The value of that equipment gives the lender confidence that they can successfully recoup their costs should the borrower default, making the lender more likely to approve a borrower’s application even in a high-risk, difficult-to-collateralize industry like cannabis. 

How to get equipment financing for a cannabis business

If equipment financing sounds right for your cannabis business, you may wonder where to get it. Not every financial institution is willing to lend to the cannabis industry, and not every cannabis-friendly bank offers equipment financing. Fortunately, it’s easier than ever to find funding from cannabis-friendly financial institutions. Join the Green Check Connect Marketplace to skip the endless searching and go directly to cannabis-friendly lenders who offer equipment financing. To save even more time, you can apply for a loan directly through our platform and use your information to apply for other financial products in the future.

We’ve made it easy to find financial institutions that actually want to work with cannabis businesses, saving you the trouble of wading through a sea of lenders who may not even work with the industry. Every financial institution on the Green Check Connect Marketplace is ready and willing to work with cannabis businesses. We’ve gathered all the best options in one place so you don’t have to start your search from scratch.

Need more than just equipment financing? The Green Check Connect network is home to all the financial products and professional services your business needs to thrive. Banks, HR companies, insurance brokers, and payroll professionals are all on the Marketplace, too.

Get the funding you need with Green Check

Green Check builds bridges between the finance and cannabis worlds, making it easier than ever to access the funding and financial services you need to run your business. Cannabis companies deserve access to reliable financial services, and our partner financial institutions believe so too. Get started with Green Check to explore equipment financing and so much more.