Cannabis is an emerging industry that’s poised for significant growth. Many entrepreneurs are planning new businesses in this space, concentrated on farming, laboratory research, and dispensing among other sectors. Regardless of which market niche is your focus, the right equipment can boost your productivity and sales. There are different ways to buy and pay for the equipment you need to grow your business. This article will explore cannabis equipment financing options to help you find the best fit when it comes to buying the things you need to take your cannabis business to the next level.
Cannabis Equipment Financing for 2020
Whether your goal for 2020 is to start a new business or expand your existing cannabis sales, there are varied ways to get the essential equipment. First, consider if new or used equipment is preferable in your situation. Obviously, new equipment comes with the latest features and peak performance. But, there are deals to be had on older, gently used equipment. Many companies specialize in selling used cannabis business equipment that they fix up and warrantee. If you don’t need something shiny and new with all the bells and whistles, choosing used might be an easy way to save your business some money.
Next, decide if buying, leasing, or financing your equipment will work best for your company. Leasing is ideal for items that need to be replaced frequently. Buying can be better for something you plan to use long-term. But, just because you have the cash to buy something outright doesn’t mean you should. That money may be better spent elsewhere depending on your business goals. Business loans allow you to pay off equipment little by little with a low interest rate. Refinancing existing equipment can give you access to cash when you need it. It can also result in lower loan rates and better terms depending on market conditions.
If you choose to move forward with a loan, you’ll need to select one with a variable or fixed rate. Fixed rate loans offer stability, but monthly interest payments are usually higher. Variable rate loans can be a good match for entrepreneurs with a higher risk tolerance. Monthly payments are generally lower, though rates may jump significantly at the end of the loan term.
Shop around, because some cannabis business financing options can offer attractive perks like no prepayment penalties and delayed payment for more than a year.
What Are the Financing Rates for Cannabis Equipment?
Cannabis industry equipment loans and leases will experience higher interest rates than equipment financing for a more traditional business. For example, conventional equipment loans generally charge about 5-8% interest depending on market rates, down payment amount, and the borrower’s credit history. Because the marijuana industry is riskier, rates typically range around 8-25%. Since most cannabis financiers are alternative lenders, there is little regulation and rates can vary widely.
Financing Options for Cannabis Equipment Loans
Because of strict federal regulations, obtaining traditional bank loans for cannabis equipment financing from large national banks is essentially impossible. The cannabis business will also likely appear on the restricted industry lists of many online lenders.
You also won’t be able to obtain a business credit card from these sources. Additionally, scoring an SBA loan is improbable in this arena. However, private lenders, venture capital investors, and credit unions that function on a regional basis may be willing to loan you capital in areas where cannabis is legal.
Specialty finance options exist that concentrate on the marijuana industry. These lenders offer a financing program for businesses like medical cannabis and cannabis dispensary companies. Marijuana-specific alternative lenders are familiar with the terrain and know how to navigate federal and local regulations. They can help businesses in the space with a variety of cannabis equipment financing needs, including working capital, bridge loans that smooth cash flow, invoice financing, and merchant cash advance loans. Some of these lenders also offer entrepreneurs commercial real estate financing for their cannabis business.
If loan funding is not in the cards, your cannabis business can lease equipment. Leasing has some advantages, including lower monthly payments, more accessible capital, and tax benefits.
Common Cannabis Equipment That Can Be Financed or Leased
Cannabis growers in particular require a lot of specialized equipment to operate. Some of the most common pieces that entrepreneurs choose to finance or lease include:
- HVAC units: Cannabis grow rooms have specialized HVAC needs to maintain temperature and humidity for healthy crops. Since the HVAC has to run constantly to keep the room at consistent levels, it’s important that these units are energy-friendly and also assist with airflow to mitigate strong odors.
- Marijuana lighting equipment: For indoor grows, perfect artificial lighting is essential. Grow lamps can make or break a harvest. Therefore, it’s important for cannabis companies to invest in the best lighting technology they can afford.
- Security equipment: The cannabis industry is highly controlled, so businesses in this arena need to take security very seriously. In fact, there are regulations at the state and federal levels to ensure cannabis products are safeguarded. Cannabis growers can lease or finance the necessary equipment, including video surveillance, alarms, and digital storage.
- CO2 extractors: These machines extract oil from plant material and are necessary to create products containing THC or CBD. Since most have a five-figure price tag, they are the ideal type of equipment for business financing.
Rules and Regulations for Financing in the Marijuana Business
Finding a financing solution for your cannabis venture can be difficult, as many banks struggle to determine how to provide business funding in this market. Currently, the federal Controlled Substances Act prohibits the manufacture, possession, and use of pot even in states where recreational marijuana or medical marijuana is legal. The federal Money Laundering Control Act also bans financial transactions that involve the proceeds of an unlawful activity, including the violation of narcotics laws. So, even in states with legal cannabis, banks, investors, and other lenders must carefully navigate the laws to ensure compliance. For many, doing so is too costly and the risk is too high, so they simply choose not to fund companies in this industry.
Presently, the House of Representatives has approved the SAFE Banking legislation that would allow financial institutions and insurance companies to serve the marijuana marketplace in states where it is lawful without punishment. It is now in the Senate awaiting its vote. Additionally, the recent Farm Bill differentiates between hemp and other cannabis plants, making industrial hemp exempt from the Controlled Substances Act and allowing its sale between states.
Types of Marijuana Equipment Financing
Depending on how you purchase the equipment for your marijuana business, different kinds of financing may be available.
At a dealership: Growers may find purchase, lease, and refinancing options on both new and used equipment through dealers that sell farm equipment. Terms generally last 2-10 years. Businesses will find easy applications for financing and leasing at dealerships as well as quick decisions based largely on your credit score. If you’re not sure about your credit standing, you can find free business credit scores online.
Through a private party: Purchase and lease options are available on farm equipment sold through private party transactions. This type of equity financing is generally available on items with a minimum purchase price of $25K before down payment. Monthly interest payments are usually low and “ag-friendly.”
At auction: Auctions are ideal places to score good-quality used equipment for farming and retail businesses like a marijuana dispensary. Lenders will check your credit prior to the auction, so make sure you review your business credit report beforehand. Again, the minimum purchase is about $25,000 (prior to down payment) and terms are aimed at meeting the unique needs of agriculture-focused companies.
Is Used Cannabis Equipment Financing Available?
Some lenders may prefer to stay away from funding pre-owned equipment purchases in any industry, simply because of the higher risk. However, there are specialized lenders who offer this option – You may just have to do a little extra searching to find them.
Credit Requirements for Cannabis Equipment Financing
Since the equipment itself serves as collateral, credit requirements might not be as stringent when it comes to a cannabis equipment lease or funding. With a fair credit score (around 650), you should be able to obtain an equipment loan, though you won’t have the most attractive interest rates. As your score increases, rates generally go down proportionally.
Are Bad Credit Cannabis Equipment Loans an Option?
Businesses with poor credit can obtain cannabis equipment financing, though it may take some extra effort to find a willing lender. Some may require a co-signer or a significant down payment to serve as a security deposit. Additionally, if business is booming and you can prove strong revenue and profits, a lender may be willing to overlook your bad credit and provide a loan.
What Is the Maximum Term for Cannabis Equipment Loans?
Equipment loans can last for a few months to 10+ years. Generally, equipment loans exist for 5-7 years. If a longer term is needed, refinancing is always an option.
Nav’s Final Word: Cannabis Equipment Financing
Cannabis may be an emerging market, but the traditional financial industry is not yet embracing it as such. As regulations are eased and more states accept pot use for medical and recreational purposes, perhaps the tone will change.
Currently, businesses will have to pay rates well beyond those of conventional lenders to make up for the risk inherent in this space. Specialized loan companies that understand cannabis regulations and are entrenched in the market are likely the best bet when it comes to cannabis business financing, from cash flow loans to equipment leases.
Before applying for any loan, be sure to check out a lender’s website and locate their “restricted industries” list. Many financial institutions have a policy to avoid certain high-risk industries, so it’s best to know whether cannabis is included in that group before wasting time and resources to apply.