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How to Finance a Marijuana Business

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Give up equity or tap into your retirement account to finance your marijuana business, not good options, are they?

The reason why investors especially those who are unfamiliar with the marijuana market are hesitant to invest in the cannabis industry is, the federal government still views marijuana as illegal. Because of that, if you use your home or retirement account to finance a marijuana business you are putting your future at risk. See the thing is, when you start a business, there is no guarantee of success. Also if it’s a marijuana business, the government can shut you down at any time and you can’t use bankruptcy as a protection from lenders. That means that, if the planets line themselves just right, you may end up losing everything you own.

Unlike in the past, nowadays, it is very difficult for new marijuana companies or businesses to turn a profit, why?

The cannabis industry is evolving and a huge number of new businesses are entering the cannabis space thanks to changing state laws. Because of that, there is lots of competition. Think about it, if you are in California, Seattle or Denver you may have noticed that today there are lots of retail stores and an overwhelming amount of product options, right?

The question is. What do you bring to the table?

If you have something new to offer consumers, go ahead, seek financing and start your business. If you are unsure, hold on to your money or don’t put yourself in debt and risk your future i.e. use what you are willing to part with.

How Much Financing Do You Need?

The financing options available to you will vary based on your specific goals and your current financial situation.

Before you start borrowing money, it is very important to know exactly how much money you need. You can’t make that number up in your head, what you have to do is talk to a financial adviser including your bookkeeper (if you have one) and the accountant who prepares your taxes. The idea is to look at your business’s cash flow and create detailed financial projections including sales forecasts that will help you determine the amount of money that is needed to achieve your goals.

The point is, don’t ask for money if you don’t know how you will use it to improve or start a business.

Peer to Peer Lending VS. Crowd Funding

As mentioned above, under federal law, it is still prohibited to sell, buy or use marijuana. That’s why your loan request was denied. However, Federal law allows investors to invest up to $2,000 in small marijuana businesses in exchange for a portion of ownership. Meaning, you can raise a lot of money for your business using crowdfunding websites such as:

  • cannaFundr
  • Fundanna
  • Growthfountain
  • seedinvest
  • 420fundme

Here is the thing, investors are looking for something fresh, so be creative, don’t copy what other people are doing and most importantly build trust with your investors.

What you have to do is create interest or give people a reason to want to give you money. So create a plan, offer rewards or shares and make your business stand out in the crowd.

It’s worth noting that peer to peer lending and crowdfunding are two different things. The difference is. You don’t have to pay back the money you get from P2P, on the other hand, in crowdfunding, the money you get is a donation or investment, or prepaid orders for your unreleased product.

Keep in mind that crowdfunding takes time, so calm down and do it right.

Private Equity/loans

loan shark

Private equity is defined as “shares representing ownership of or an interest in an entity that is not publicly traded”.

Due to the absence of bank loans, private investors including venture capitalists, angel investors, equity funds and some consulting funds provide high-interest loans to marijuana businesses. Note the “high-interest loans part”.  Thing is, according to LA Times you may borrow $5,000 and end up paying more than $42,000.

The point is, before you choose this option, make sure that you can keep up with interest payments. Think long term, do your math and figure out if this is a good option for you and your business.

The conditions set on business or individuals seeking this type of financing are:

  • You must have good credit score.
  • You must have been in business for at least 6 months.
  • Your monthly gross sales should exceed $10,000.
  • You must have a business account.

Leasing

If you need vehicles or equipment for your marijuana business, you should consider leasing instead of buying, why?

Leasing will help you maintain strong cash flows because you won’t have to pay a down payment on the equipment. It is also possible to structure a lease in such a way that it doesn’t show up as debt on your credit rating.

The advantage is, you get the most up-to-date equipment even if you don’t have the money to pay for it at the moment. This gives you competitive advantage. You should consider this option if you intend to start a grow facility or distribution business.

Save or Fundraise

The reason why you should consider saving for your business is. You won’t owe anyone anything thus you won’t have to worry about losing your car, home or business. Now, it is not a must that you start your business next month or next week. There is no harm in saving for let’s say 5 years to start a business.

Another safe option to raise funds for your marijuana business is to fundraise. Dumbed down, fundraising is asking people to give you money for free.

Hold a house party, talk to friends or stalk your rich uncle.

Generally, the best advice I can give you today is, try as much as you can to keep yourself out of debt. If that can’t be avoided, make sure that you can pay what you owe without putting too much strain on yourself. Alternatively, put up something you are willing to lose as collateral e.g. your

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