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Marijuana Financing for Legal Cannabis Businesses

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).

Minimum Requirements

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!

 

Cash Flow Management Tips for Small Business Owners

As a small business owner, you’re faced with many daily, weekly and lifelong challenges. One of the biggest challenges and most important is cash flow management. Mismanagement of cash flow creates cash flow gaps, which can literally put you out of business by missing a crucial bill like paying a supplier your business depends on.

A cash flow gap occurs when your expenses come due prior to revenues coming in. It’s not that you can’t afford your expenses, it’s just a timing difference – you don’t have the cash flow (yet) to pay the bills. For small business owners, cash flow gaps can occur from delayed payment terms, fluctuations in business, and an unexpected additional capital commitment to start a job.

Use the following tips to help avoid any pitfalls in your cash flow.

 

Cash Flow Management is a Frame of Mind.

Small business owners should operate in large, broad frame of mind that is always asking, “how does this affect my cash flow?”. Think about what the net benefits and costs are of each purchase you make or deal you book. Also try to think of the timing of it. Ask yourself if you have enough cash on hand or access to credit (i.e. like an American Express for business). If not, don’t book the order or agree to purchase anything, unless you have very favorable terms.

Map Out Your Dollar Life Cycle

To successfully manage cash flow you need to understand the road map of each and every dollar. Ask yourself this – if you take $1 right now, and deploy it into your revenue generating activities, how many rest stops will your dollar make? How many hands touch that dollar before it comes back into your bank account? How long will it take to get into your bank account? Understanding the flow and timing is crucial.

Be Conservative with Timing

You can be conservative with your cash flow management approach in 2 days, neither of which are mutually exclusive. First is to be conservative with the timing of revenues, and the second is to be conservative with the amount. Think you’re doing to get paid in 10 days? Call it 15. Issuing an invoice payable in 30 days? Bank on getting that money in 36 days. It’s important to add buffer zones to the timing of your income and expenses, to keep expectations in order. If you manage your expectations, you can manage your cash flow a lot easier. Also, you should underestimate sales. If you buy 5,000 units of a product and based on past data you expect to sell it over the course of 2 months, budget as if you’re selling it over 3 months. This way if things slow down, you don’t run out of money.

Build a Cash Reserve

Cash is king. It never, ever hurts to have additional cash on hand. Pay yourself $10-$20 per day, or something nominal. Make sure you can afford to set aside cash. Figure out what the number is, divide it by 21 (for each business day), and set aside that money into a separate reserve account. Having a cash reserve can be used as a way to bridge cash flow gaps if they occur.

Explore Invoice Factoring

Factoring your accounts receivable is a great cash flow management tool. Although it costs 1-2% per month, consider this a revenue share for outsourced cash flow management. With invoice factoring, you can pick and choose which receivables you want to sell on a daily, weekly or monthly basis and as you generate them, accelerate the cash from them. Let us know if you need help finding an accounts receivable factoring company, we’re happy to help.