Financing a medical marijuana dispensary may be more complicated than you anticipate. While many people have acknowledged that cannabis could have many positive medical effects, navigating the various state and federal regulations, tax requirements and financing options is still complex. If you are a new startup looking to find a business loan for a dispensary or marijuana equipment financing, research the different options to see what best fits your business.
What’s Different About Cannabis Loans?
Because marijuana is still illegal on the federal level, few banks are willing to work with new dispensaries. It may be challenging to find a private lender, while interest rates tend to be higher when you find a loan. However, it is not impossible to find the financing you need.
Many banks will typically avoid giving dispensaries a loan because of regulations set by the Federal Deposit Insurance Corporation (FDIC), which may choose not to insure banks that provide loans to companies that technically violate the law. To get around this regulation, some banks finance marijuana-related businesses rather than an explicit dispensary, avoiding working with the plant.
Some banks may want to avoid funding a marijuana startup before cannabis is fully legalized at the federal level. However, there are many states where the Department of Justice tolerates cannabis companies due to state legality. With the ever-changing political climate, finding the proper funding is difficult but not impossible. If the United States fully legalized marijuana, more banks would be willing to give out loans to startups than ever before.
What Are the Common Types of Loans for Marijuana Dispensaries?
Once you understand whether or not your state has legalized marijuana, you may wonder how to get a loan to open a dispensary. Some common types of loans may fit your business needs. These include equipment financing, a line of credit, short-term loans and merchant cash advances.
For startups looking for money to purchase new equipment, an equipment loan may help you find the necessary items like vehicles, sales systems, furniture or fixtures. There are two kinds of equipment financing — a loan or a lease.
Equipment loans let you pay up to a percentage of the total cost of your equipment while the lender pays the rest. After putting some money down, you’ll be required to pay the lender weekly or monthly until you take full ownership.
An equipment lease requires that you pay a down payment and then use the equipment through a set lease period. After you’re done, you can return the equipment or sign a new lease. You won’t own the equipment no matter how much you pay, and while you may have lower monthly payments, you may spend more over time with the leasing expenses.
Line of Credit
Opening a workable line of credit is a flexible loan option if you appreciate having a set limit rather than a lump sum payment. When the lender sets your credit limit, you can take out multiple smaller loans until your limit has been met. Use the money for your needs, such as hiring employees or covering operating expenses. Repayment can come in the form of interest or a fixed fee set by the lender and is typically based on your current credit score.
A short-term loan is an excellent option for businesses that require a lump sum to get started. Use the money to purchase equipment or hire employees and expect the loan terms to last anywhere from 12 months to a few years. Depending on your agreement, you’ll probably have to make daily, weekly or monthly payments. Because the loan is short-term, many lenders don’t require you to pay interest, but rather a one-time fee added to the original cost.
Merchant Cash Advance
If you are a startup that hasn’t been in business very long and you have a lower credit score, it may be a good idea to consider a merchant cash advance. This kind of loan lets you receive funding quickly. However, it often comes with high-interest rates and shorter repayment terms than other loans. A merchant cash advance also requires selling future revenue to the original lender and any additional fees added to the original amount. Remember, when business sales are higher, your fixed payments will be higher and vice versa.
Most Popular Cannabis Business Funding Options
While there are several funding options besides loans available for financing a medical marijuana dispensary, some of the most popular forms make it easier to find money or donations. Here are a few popular funding options:
- Credit cards: Use your business credit card to pay for startup expenses like buying seeds, leasing and equipment fees. If you frequently use your credit card, your score will be higher, and a lender may consider you a better loan option.
- Crowdfunding: Raise funds for your startup by going to a crowdfunding site like Fundable, Fundanna or CannaFundr and asking for donations. Check associated fees and the applications’ regulations to raise funds through a crowd of people.
- Investors: Whether through private equity firms, angel investors or venture capitalists, investors will fund your business in exchange for a stake in your company’s profits. Find potential investors through ArcView Group, AngelList or your personal network.
- Venture capital: A popular way to get funding, a venture capitalist is someone who focuses on your industry and wants to give you money. Usually, these are owned or run by celebrities that have endorsed marijuana usage and use cannabis regularly.
- Online lenders: Many online lenders are willing to work with cannabis companies since they aren’t affected by federal regulations. Since online lenders don’t need to report to the Financial Crimes Enforcement Network, they can give you a loan in the form of a personal loan.
- Personal loans: If you have a good credit score and a consistent income, you may qualify for a personal loan. Use the money for startup expenses, but remember to convey how the funds will be used. Look around for a lender willing to be involved in the cannabis industry.
Medical Marijuana Dispensary Business Funding Qualifications
Cannabis business startup loans or finance options may require different qualifications. For example, if you plan to use your credit card, you’ll need to provide your name, name of business, contact information and your projected annual revenue. However, a loan or line of credit will require additional information and professional documents to prove you qualify.
First, calculate how much money you need to borrow and whether or not you’ll be able to pay the money back with interest. Find your credit score and work to build credit if it isn’t as high as you would like. By understanding each lender’s requirements, you will be better equipped to decide on financing. Be prepared with your personal information, business information, credit score, background checks, licenses, bank statements, balance sheets and business plans to present your best self to the lenders.
Find Cannabis Tax Assistance With Polston Tax
At Polston Tax, our experienced cannabis industry team is ready to help you navigate the rules and regulations surrounding marijuana distribution. We understand that cannabis tax laws require you to comply with different state and federal regulations and Section 280E of the IRS tax code. Our company finds the right accounting service or program to fit your unique business model, with robust solutions that let your company continue growing and thriving while remaining compliant with your state laws.
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