Author Topic: Common Challenges of Legal Cannabis Startups  (Read 6605 times)

orthene

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Common Challenges of Legal Cannabis Startups
« on: November 02, 2022, 01:37:55 PM »
https://www.rollingstone.com/culture-council/articles/common-challenges-legal-cannabis-startups-1234622327/

IN BANKING PARLANCE, referring to a business as “bankable” means that the business is at a point in its life cycle where it could qualify for some form of a traditional financing package from a traditional financial institution. For any startup, this would be considered a major milestone. For a legal cannabis business, this would absolutely be a cause for celebration. In cannabis, just getting the basic depository services that most businesses take for granted can be a mission. Credit? Forget it.

This begs the question: Are cannabis businesses bankable? Well, they can be, yes. I work with many great banks and credit unions all over the country that are lending on plant-touching businesses and plant-touching properties. But, let us peel that onion a bit.

Let’s first talk about the startups: In a new market, all these new license holders, or for that matter aspiring license holders, are not bankable — sorry. That is not a cannabis issue though — that is a startup issue. Unfortunately, it is a harsh reality that if you don’t have enough startup capital for your business, there just simply won’t be a business. Banks and credit unions are not traditionally sources of startup capital. In select scenarios, there are programs that may be helpful, such as various SBA programs, for example. Unfortunately, those programs are not available in cannabis at the moment. With some hemp-based products, USDA and/or other government programs may be available, but not so much for THC products. Again, it’s important to note that this particular blocker is not due to the business being a cannabis business but rather a fairly common issue that every startup has to contend with.

Depending on your loan officer, you may have heard them reference the three C’s, or the four C’s, or maybe even a weird story about the legs of a stool in discussing lending to your business. Outside of cannabis, once a business can demonstrate a few years of positive operating history (typically two or three years), it should be at a point where it could be bankable and a credit facility would be accretive. A cannabis business, however, does have a specific challenge even with all of the above in place. Unfortunately, it happens to be one of the basic tenets of lending — the all-important collateral. That is to say, it doesn’t have any. A typical cannabis business’s most important asset is arguably its license, which can’t be held, or at least you can’t perfect a lien on it (in most states). Inventory, well that should be obvious, so that really only leaves real estate.

Real estate brings up another issue in cannabis financing: valuations. There are cannabis valuations, and then there are market valuations. They are not the same. With retail locations, the difference tends to not be as stark. With cultivation, there often is a significant gap. I have seen the difference between an indoor grow house vs. a comparable industrial use space in the same general area be as much as three times as much. The problem with this dynamic is that if you consider it from the lender’s perspective, their concern with respect to the collateral is their ability to use the value of the property to exit the loan cleanly. In other words, should the loan default, what would the property fetch in a foreclosure? This “go-dark” value considers the worst-case scenario for the lender and is a prudent factor in analyzing the credit.

These types of challenges are not unique to the cannabis industry. Valuation gaps, for example, are common with special-use properties. If we were to look at financing for data centers, we would see that it is a strong analog to compare against indoor grows. A data center is also just a giant warehouse space with lots of cooling equipment. The lack of “clean” collateral is not that uncommon either and is one that various other industries grapple with as well. Many businesses that require a license to operate have that same factor in their credit conversations. If you can find the right lender, they should have the knowledge and experience to deal with these issues.

So, are cannabis businesses bankable? Yes. But while banks and credit unions can — and have been lending to the cannabis industry — most cannabis businesses do not really fit neatly into the traditional underwriting box. It takes a bit of creative thinking and a heavy dose of education about the industry before traditional FIs can get more comfortable with cutting checks.

Of course, then there’s the whole IP issue and a little thing called 280E, but that’s a topic for another article.
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jones

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Re: Common Challenges of Legal Cannabis Startups
« Reply #1 on: November 02, 2022, 06:43:43 PM »
So in other words, the answer is No

 

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