As of mid 2017, medical marijuana is legal in 29 states and 7 states have legalized recreational use. This has resulted in a “pot rush”, where many enterprising individuals are entering the market to somehow capitalize on marijuana. Successful existing cannabis businesses are growing tremendously, the weak ones are getting shaken out, and new players are stepping on the scene. All of this has resulted in a tremendous need for marijuana financing, namely working capital.
Marijuana Financing and Working Capital
A great working capital product for cannabis businesses is the “future revenue advance”. This product is structured as a purchase of future bank deposits (not a loan) so it complies with — and does not fall within the reach of — state regulators. Before we get into the details of how it works, here is a quick summary of the highlights:
- Cheaper than investors – scale growth without giving up profits forever
- No collateral required – business or personal
- No personal guarantee – operate with the freedom to know your personal assets aren’t at risk
- Often unsecured by funder – some funders don’t even ask if you have collateral
- Funding in 24-48 hours – great for emergency or opportunities
- 4 month revenue history – just getting started? No problem.
How it works
This type of funding requires no collateral and is often unsecured. The way it works is that the funding institution will “purchase” a chunk of future revenues from the business, in exchange for a fixed payback. Payment amount is determined by past bank deposit activity, and is often represented as a percentage of historical average deposits. Basically, payback is a fixed royalty (i.e. 10% of revenue) for a fixed period of time (until paid off).
Why It Works
The future revenue purchase is ideal for cannabis businesses for a few reasons. First, the time to receive funds is usually 48 hours. Second is that it is way cheaper than investors. A relatively new cannabis business might pay a lender 20-30% over 6-18 months, but that same business would pay an investor 20-30% for life for the same amount of money. Also bear in mind that this is more expensive than a traditional product like a loan because it is often unsecured, no collateral is required, nor is a personal guarantee. Lastly, there are no limitations for which the funds can be used.
Use of Funds
Funds can be used for whatever you want, however you want to deploy them in a way that makes sense, to either exploit an opportunity or prevent a disaster. Popular uses of funds include:
- Expansion financing – we’ve had many clients use the funds to make a down payment on a new leasehold for expansion of their growth operations. Many cannabis businesses are on the hunt for new, bigger locations and are being outbid by their competitors. Having the capital in hand to back up your bid goes a long way. Funds can also be used to purchase heat lamps.
- Acquisition financing – now that the market is becoming (relatively) more mature in states like Colorado and Washington, smaller players are realizing the struggle and offering their businesses up for sale. This is allowing the bigger players to capture more market share at scale. The revenue advance can be used to acquire existing businesses or assets from a business.
- Working capital – sometimes businesses simply need the extra cushion in their bank account to bridge them to busy season. Or to hire new staff. Whatever the reason may be, this is a great marijuana financing solution provided however you have the margins to support the payback.
- Emergency capital – as a business owner you know things can go wrong and fast. Having access to liquidity can help you prevent disaster by affording you the ability to remedy the situation as needed, and in a timely manner.
Example Marijuana Financing Deal
A typical revenue purchase for a cannabis business that averages $100,000 in deposits would look like this: the funder would purchase $125,000 of future revenues in exchange for $100,000 up front. Viewed differently, the amount the cannabis business would receive is $100,000 and the payback would be $125,000. Payments are usually 10% of average monthly deposits, or $10,000 in this case. So the payback time would be slightly over a year ($125,000 divided by $10,000 = 12.5 months).
The revenue purchase is fast and flexible, so it is not overly burdensome for a cannabis business to obtain marijuana financing. Usually, here are the requirements to obtain a quote:
- 1-page application – business name, Federal EIN #, etc. must be a business entity applying
- 4 month revenue history – evidenced by bank statements, deposited into a business checking account, not a personal account
After you’ve obtained a quote, and you’d like to proceed with funding, the following is required:
- Proof of ownership (i.e. tax return schedules)
- Copy of a voided check
- Bank statement and account verification
- Copy of owner’s drivers license
- If over $75,000, financial statements (P&L and balance sheet)
Contact us today if you’d like to learn more!