CBD Business Loans: Where to Find One and How to Apply?

Innovative Industrial Properties

The Difference Between Cannabis and CBD/Hemp Businesses

Compared to businesses that deal with hemp cannabis companies face much more obstacles while applying for CBD business loans. The reason is a different status of these two products:

Since the 2018 Agriculture Act was passed, hemp is no longer subject to FDA regulation. This means that hemp which does not contain psychoactive components can be produced legally on a federal level, and hemp companies apply for loans under the same conditions as any other businesses. And CBD remains in a dubious legal gray area.

Unfortunately, cannabis businesses are still legal only on a state level which makes it difficult for business owners to find financial solutions. Due to the high concentration of THC (a psychoactive component in the plant) cannabis has uncertain federal status and companies need to call upon non-federal lenders’ services.

 The legality of cannabis and cannabis-related products hasn’t stopped sales in the industry from booming. The estimations for the U.S. market for marijuana could reach $25-30 billion by 2023 while CBD alone could surge anywhere from $16 billion to $24 billion by 2023.

Challenges Cannabis Business May Meet

Although growing and cultivating has been legal for more than three years already since the Farm Bill 2018 was signed, financial institutions have not built up a coherent system of regulations when it comes to difficulties connected with selling products derived from the plant. Many banks still prefer not to risk by lending to CBD businesses while alternative lenders approve CBD business loans at their discretion.

Nevertheless, in those states where recreational and medical marijuana is legalized, smaller alternative financiers start to play a more important role on the market than national banks. As there are many loopholes in legislation, credit institutions try to make the most of it and develop new schemes.

However, in states where cannabis for medicinal and recreational purposes for adults is legalized, local financial institutions are certainly becoming more resourceful than the big national banks. As experience suggests, some credit unions try to find loopholes in legislation that allow the cannabis businesses to work with them.

cbd business loans

As more local banks look for new opportunities for providing financial services for cannabis entrepreneurs, this type of CBD business loans is still hard to get due to the following problems:

Cash Business

It is always a high-risk factor when it comes to running a business in cash. It is difficult to track and record, so small businesses can’t provide relevant credit ratings or bank statements to the lenders. More than that, if the company doesn’t have any collateral, it makes it almost impossible for the financier to collect payment compulsorily. 

High Risk 

Banks insured by Federal Deposit Insurance Corporation keep away from working with the cannabis companies as the rules of FDIC state: the whole industry may be considered as high-risk, and it’s recommended to avoid any kind of negative response from the public, as well as federal law violation. Besides, if a bank provides loans to a drug-related company that violates state law by transporting the products across state borders, the bank will be subject to close monitoring by the government. The solution has been found: the industry deals with state-owned financiers.

3 Types of CBD Business Loans

Bridge Loans

Bridge loans, also known as “gap financing” or “swing loans”, are defined by their temporary nature (up to one year) compared to long-term funding solutions. The company may use this type of loan while searching for permanent funding. Though bridge loans are a good help due to their ease and simplicity, you should be aware of interest rates which are traditionally higher than average. These loans require collateral and can be used for rent, working capital, inventory, utilities, and other expenses that your business needs to cover quickly.

Merchant Cash Advances

Unlike bridge loans, a merchant cash advance is not a loan itself but a lump-sum payment against future sales. This type of financing does not require collateral is available to companies that have a steady volume of credit card sales. After you’ve received the money from the lender you will need to pay it back in 12-18 months as soon as you get profit from sales or services. Usually, lenders take a percentage of your sales daily, so the final cost of MCA is significantly bigger than other CBD business loans based on the interest rate or annual percentage rate. 

Private/Alternative Loans

Due to their flexibility non-bank lenders are the most popular funding sources for CBD business loans. They cater directly to small business owners and can take to account such collateral as future revenue or even client invoices. But before applying you must ensure that the lender you are considering for a loan is interested in your sector of the industry (for example, some financiers don’t approve loans for growers or cultivators but focus on edibles or retail businesses). 

Unlike banks, alternative lenders approve applications faster and are more flexible in their requirements for your CBD business. 

Dama Financial

Dama Clients receive access to secure online banking and cash courier services that minimize the financial and safety risks of having large amounts of cash on hand. Deposits can be made with cash (via courier service), checks or electronically (ACH or Wire). Payments can be made electronically or by check.

Dama Financial

National Business Capital & Services

National Business Capital & Services started serving the cannabis and CBD industry through its new program, CannaBusiness Financing Solutions.

National Marijuana and CBD Lender

Diamond Business Loans

Diamond Business Loans is a Direct Lender, Brokerage, and Syndicate. From startups to well-established marijuana businesses, the company has a suitable financing solution for all.

Diamond

GoKapital

GoKapital works with national lenders to avail merchant cash advances to marijuana businesses. The company offers better loan approval rates than many local banks.

GoKapital

Next-Financing

Next-Financing works with its lender partners to offer working capital, ACH and MCA loans, along with advance consolidations, term loans. Invoice financing and equipment financing to name a few of their available programs.

Next

First American Merchant

First American Merchant accents merchant cash advance applications from cannabis and CBD dispensaries. A merchant cash advance is receivables financing that allows you to sell some portion of your future sales to a lender at discount.

FAM

How You Can Use a CBD Business Loan

Real Estate 

Real estate loans are the first entry on your list if you are starting a cultivation business because fertile soil is essential for any growing cannabusiness . But you will need real estate for other purposes as well, i.e. for a warehouse, processing facility, dispensary, or office. To secure the loan the lender usually uses collateral that can be liquidated quickly. Assets can also be accounts receivable, purchase orders, land, equipment, or inventory.

Equipment

If you plan to cultivate the plants indoors or under special conditions (for example, using hydroponic systems), cannabis equipment loans are the first thing you need to look out for. You can get a loan to purchase HVAC, lighting, and security equipment, as well as CO2 extraction supplies if you are starting a CBD business. There are also good loan options for dispensary equipment such as compliance, labeling, safety, and even accessories. 

Cannabis equipment loans

Working Capital

Working capital may include everything you need to operate successfully: rent, salary for your team, inventory, marketing expenses, etc. As your CBD company starts to grow, these costs will gradually increase. However, getting a working capital loan can be a little more difficult because they are usually not collateralized. Generally, most financial institutions won’t approve this type of loan without checking your business reputation and your background as a payer. You should also take into consideration that working capital loans tend to have higher interest costs.

Capital projects

If you own a CBD company for a while or can support a significant initial investment, a capital projects loan is the type you will most likely apply for. Usually, they require a minimum of 10 million dollars and can be used for purchasing equipment or real estate as long as you provide assets as collateral. If you launch a long-term project, the interest is usually lower than 5 but it may increase for short-term CBD business loans. 

How to Qualify 

To make sure you are creditworthy most lenders will require your credit report, up to six months of bank statements, income statements, and balance sheets. 

The credit report shows the lender information about your credit score that must be at least 670. Also, you must confirm that you don’t have bankruptcies and all your payments have been made on time. To protect themselves from risk, the lender may also require you to give information about your key management personnel together with licenses issued by public bodies. 

Complete the Application

Generally, lenders accept online applications where you can include key information about your business and get a quick response if you qualify. If the lender considers there is enough of a fit to proceed with your application, you’ll move to the second step.

Prepare Documentation

Make sure to prepare all needed documents as the lender will want to evaluate them and based on the results to make the final decision. Besides financial papers that verify your credibility, you should also be ready to provide:

Business plan. As the financier wants to make sure you are serious about expanding your business, you must have a thorough step-by-step plan containing accurate calculations and exact numbers that will show estimated profit and loss, cash flow, and balance sheet. 

Vendor quotes are necessary as they prove you already have agreements with vendors and are going to spend the loan on big purchases. 

Collateral documents may not be required for some types of CBD business loans but it is a good idea to prepare them as they will describe the lender value of your personal or business property. 

Check Your Lender

Unfortunately, many shady business loan providers tend to work with businesses that are considered risky. To make sure your potential lender is legitimate and his CBD business loans are reasonable, you should check information about the lender.

Though there are many lenders on the market, it’s difficult for shell corporations to create a convincing web presence. Before applying for the loan, check the social media pages of the financier and find some articles where the lender is mentioned. Customers’ feedback on independent resources is another good source of information.

Final Thoughts 

While cannabis businesses are legal on the state level, the uncertain federal status of the whole industry can still be a sticking point for its successful growth. Though the situation is not moving at the desired pace and the official answer of federal banks is No, private funding is a great option for young entrepreneurs. 

Before applying for CBD business loans consider that you have to be ready for rates beyond those of conventional financiers: this is the price the industry pays while paving the way for legalization. If you do good research, you will find reliable lenders that specialize in cannabis particularly and know all the ins and outs of the funding. You can find more loan providers in our directory.

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