How To Finance A Medical Marijuana Dispensary

Financing any small business is a headache, but acquiring funding for a medical marijuana dispensary can be even more of a challenge. Medical — and recreational — marijuana is legalized in states across the nation, but it is still illegal under federal law. These laws make it more difficult for owners of medical marijuana dispensaries to apply for loans, open merchant accounts, or receive other types of financing to cover operating expenses or to scale their businesses.

However, even though financing may be limited, there are options out there. To fund your business, you have to know where to look and even get a little creative when other options don’t pan out. Whether you need money to expand your business or you’re seeking funding for your startup, we’ll review the financing options available to you and how to qualify. Read on to learn more and to move toward financing your medical marijuana dispensary.

Medical Marijuana Dispensary Funding Challenges

Obtaining funding for any business is no easy task. You have to find a lender that offers the best rates and terms to receive the most affordable loan. Once you’ve identified your lender, you go through the underwriting process, making sure you have all of your paperwork in order to prove that your business is qualified to receive financing. Challenges may pop up throughout the process. Depending on the lender you work with, it may take weeks or even months to receive financing, from start to finish.

With a medical marijuana dispensary, there are even more hurdles you have to clear on the race to financing. Even though more states are legalizing medical marijuana, it remains illegal under federal law. Most lenders want to avoid the potential legal repercussions of working with businesses in the cannabis industry, as these businesses are considered high-risk. Even opening a checking, savings, or merchant account for most medical marijuana dispensaries is a hassle, while receiving financing through traditional lenders is nearly impossible.

And if you do find a financial institution that will allow you to open accounts, there are many associated costs, including fees for background checks and for regular reports to the Treasury Department’s Financial Crimes Enforcement Network. Businesses that don’t have merchant accounts and work with cash have additional business expenses to protect their earnings — think high-tech video surveillance systems and reinforced windows and doors.

In other words, medical marijuana dispensaries have the same expenses as regular businesses (utility bills, property leases, etc.) as well as additional expenses to keep their business protected. These expenses pile up quickly, but due to legal issues, traditional financing is often not an option. Therefore, medical marijuana dispensaries either have to make enough capital on their own to keep the business moving forward, or these business owners have to seek out other means of financing.

Can I Get A Dispensary Loan From A Bank?

Banks are insured by the Federal Deposit Insurance Corporation. A bank that works with companies that violate federal law will not be insured by the FDIC. This includes medical marijuana dispensaries. Instead of taking on this risk, most banks opt to simply avoid working with businesses in the cannabis industry.

There are also legal issues that a bank could potentially face when working with businesses in the cannabis industry. For example, a bank could be charged with money laundering for accepting deposits from a medical marijuana dispensary. Although the odds of this law being enforced are slim, lenders simply don’t want to take that risk.

For those reasons, most banks will not loan money to medical marijuana dispensaries or other businesses in the cannabis industry. While a FinCEN report showed that over 400 banks in the U.S. operated accounts with marijuana businesses in early 2018 — up 20% from early 2017 — marijuana businesses still do not have access to a full range of banking and financial services offered to other businesses, such as loans, credit cards, and merchant accounts.

When most business owners can’t receive funding from banks, they turn to another great resource: the Small Business Administration. The SBA provides educational materials, training, and low-interest, long-term loan options when small businesses can’t receive traditional loans. Do medical marijuana dispensaries receive access to these same loans?

Unfortunately, the SBA does not work with medical marijuana dispensaries. A policy went into effect on April 3, 2018, that prohibits SBA intermediary lenders from providing loans to businesses in the marijuana and hemp industries.

Though this news may be understandably frustrating if you’re seeking an affordable loan, there are financing options available to you. You just won’t find them at a bank or through the SBA.

Equity Financing For Medical Marijuana Dispensaries

One option that you may consider to fund your medical marijuana dispensary is equity financing. With equity financing, an investor or group of investors will provide you with the capital your company needs in exchange for ownership interest in your business.

Debt refinancing — traditional loans, lines of credit, and other financial products — requires you to make regular payments along with interest and fees. With equity financing, you’ll receive the money you need without having to make these regular payments. However, the tradeoff is that your investor will own a stake in your company. Once your business becomes profitable and successful, your investor will be able to take a percentage of your profits for the life of your business, unless you buy them out.

The benefit of equity financing is that you won’t have to worry about paying interest or regular payments right away. The drawback is that you are giving up ownership, and in some cases, the investor may be able to have a say in the operations of your business. For example, if later down the road you decide to make a large purchase to expand your business, the equity investor may disagree. With equity financing, you no longer have full control over your business.

The Best Loans For Marijuana Businesses

If equity financing isn’t for you and traditional bank financing and SBA loans are off the table, how do you get financing for your medical marijuana business? Alternative lenders have made it easier than ever to receive funding. While rates and terms may not be as favorable as traditional financing, solid revenues and a high credit score can help you score affordable loans to fund operations or expansion of your business.

While you may find alternative lenders are more willing to work with your business, just know ahead of time that some lenders may have restrictions on financing businesses in the cannabis industry. Before applying, do your research to find lenders that work with medical marijuana dispensaries and other high-risk businesses.

You also need to consider what type of financing you need for your business. Whether you need a flexible line of credit or financing to purchase new equipment, alternative lenders have options available for you.

Short-Term Loans

When you receive a short-term loan, you’ll receive one lump sum that can be used for any business purpose. A short-term loan can be used as working capital, to purchase equipment, for hiring new employees, or for other business expenses.

Although some short-term loans are true to their name and have shorter terms of 12 months or less, some lenders have repayment terms up to 3 years. Depending on the lender you choose, you may have daily, weekly, or monthly payments.

One way that short-term loans differ from other loan options is that most do not have an interest rate. Instead, a multiplier known as a factor rate (or factor fee) is used by the lender. This factor rate is a one-time fee that is added to the cost of the loan and replaces traditional interest. Like interest rates, your factor rate is typically determined by a combination of factors such as the performance of your business and your personal and business credit histories.

One of the benefits of short-term loans is that you often receive money quickly. Some lenders provide funding in as little as 24 hours, while others may approve and fund your loan in 3 to 5 days.

Equipment Financing

If you need capital to purchase new equipment, equipment financing is an option that’s available to you. With equipment financing, you can purchase nearly any type of equipment for your business, from vehicles to point-of-sale systems to furniture and fixtures.

There are two types of equipment financing. The first is an equipment loan. When you receive an equipment loan, you’ll pay 10% to 20% of the total cost of the equipment. The lender will pay the rest of the costs so that you can take possession and put the equipment into use immediately. If you have good credit, you may qualify for $0 down financing. However, putting at least a small percentage down, even when it’s not required, helps lower the cost of borrowing and your payment amounts.

After you’ve received your equipment, you’ll pay the borrower on a scheduled basis — typically weekly or monthly. Your payments will go toward the balance of the loan as well as the interest charged by the lender. Once you have made all payments as scheduled, you take full ownership of the equipment.

The second type of equipment financing is an equipment lease. With an equipment lease, you may also have to pay a down payment. Once you make the down payment, you can use the equipment through your lease period. Once the lease period ends, you return the equipment and sign a new lease for updated equipment.

With an equipment lease, you never own the equipment unless you pay the remaining balance at the end of your lease. A lease may be a good idea if you plan to upgrade any of your equipment regularly. Equipment leases may also come with lower down payment requirements and lower monthly payments. However, you’re essentially renting the equipment and you may end up spending much more over the long term with leasing.

Lines Of Credit

If you need a flexible form of financing, a line of credit is an option to consider. With a line of credit, you don’t receive just one lump sum. Instead, the lender will set a credit limit for your account. You can make multiple draws from your line of credit up to and including the credit limit.

With a line of credit, interest or a fixed fee will only be charged on the borrowed amount. Fees and interest vary by lender and are usually based on your creditworthiness or business performance.

Even if you have credit challenges, you may qualify for a line of credit. Some lenders base their approvals solely on cash flow and other performance factors.

A line of credit is good for any small business because it is so flexible. Funds can be used for any business purpose, and you won’t have to wait for approval. Once you initiate the draw, the lender typically transfers the funds to your banking account immediately, and you can access your funds as soon as the next business day.

Lines of credit are also flexible in how they’re used. You can use funds to cover operating expenses, hire new employees, handle an emergency situation, or for any other business purpose.

Merchant Cash Advances

If you haven’t been in business long, have a low credit score, or don’t qualify for other loan options, you may consider applying for a merchant cash advance.

Even though you can receive funding quickly through a merchant cash advance, these loans often have high interest rates and short repayment terms. This is why it’s more important than ever to do your homework to find a lender with the best rates and terms.

When you take a merchant cash advance, you agree to sell future revenue to the lender. The lender pays you a lump sum amount, and a factoring fee is added to the amount of the loan. Other fees may also be added.

The lender will then withdraw money from your account on a regular basis. Most lenders take payments daily, while others may have weekly or monthly schedules. These withdrawals will be made until the loan balance and all fees have been repaid.

Some merchant cash advances have fixed payments. Others deduct a specific percentage of your sales. When sales are up, your payment is higher. When sales are down, your payments are lower.

The funds from merchant cash advances can be used for any business purpose, including the purchase of supplies, inventory, and equipment or for use as working capital.

Crowdfunding Your Medical Marijuana Dispensary

Another option for financing your medical marijuana dispensary is crowdfunding. With the rapid growth of the internet, crowdfunding has become a popular option for many small businesses, even those in controversial industries.

Crowdfunding is a way to raise money from multiple investors in exchange for equity or rewards. With crowdfunding, you’ll promote your campaign online by sharing with friends and family and posting links to social media. Anyone can donate to help you reach your fundraising goal.

There are two types of crowdfunding campaigns. The first is equity crowdfunding, which is when you give up equity in your business in exchange for investments. The second is non-equity crowdfunding. With this type of campaign, you won’t give up ownership of your company but will instead offer a reward or benefit to investors.

The tricky part of crowdfunding is that medical marijuana dispensaries are prohibited from posting on many of the most popular crowdfunding platforms. However, there are a few platforms that allow businesses in the marijuana industry to launch and promote campaigns.

One crowdfunding platform to consider is Fundable. Through Fundable, you have the option of launching a rewards campaign, an equity campaign, or both. It’s important to note that equity campaigns on Fundable can take years to complete. There is no limitation on the length of your equity campaign. However, you must pay a hosting fee of $179 per month through the duration of your campaign.

The Best Financing Options For Startups

As we’ve already established, finding financing for your medical marijuana dispensary can be a challenge. While there are options available for established businesses, what if you’re brand new to the industry or haven’t even opened your doors yet?

If you need financing to get your business off the ground, there are funding options for startups. The first step is to determine what expenses you’ll have and how much money you’ll need before exploring your financing options.

The Costs Of Starting A Medical Marijuana Dispensary

A medical marijuana dispensary has many of the same expenses as any other startup business, with a few added expenses since this is still such a new and controversial industry.

Before you even get your business started, you will have to apply for licenses and permits. Application and licensing fees range from a few hundred dollars to several thousand. In the state of Colorado, for example, licensing fees are $20,000. One of the first things you should do before starting your business is to learn about the laws, requirements, and fees specific to your state.

Because you’ll operate a storefront, you’ll need to rent, lease, or purchase commercial space. If utilities aren’t included in your monthly rent, these additional expenses will add to your total startup costs. You may have to do some remodeling to make the space suitable for your business, which will add in more costs.

Even if you plan to run a very small dispensary, you’ll still need staff. Whether you’re hiring one person or ten, you’ll need to consider the costs of hiring and training staff members and managers.

Additional purchases for your dispensary include a POS system, furniture, fixtures, and a high-tech security system. One of the most important expenses is your inventory, which is a recurring cost you should consider when calculating your total business expenses.

When planning how to fund these expenses, there are a few financing options to explore. One option may work well to best fit your needs, or you may consider combining a few options to fully fund your startup business.

Crowdfunding

Crowdfunding is a way to raise funding for your startup business. For a medical marijuana dispensary, an equity-based campaign is typically the best option. Even so, it may take several months or longer to raise the money you need to start your business.

Unlike other businesses, you can’t just go to any crowdfunding site. Marijuana dispensaries are prohibited from using some of the most popular crowdfunding platforms. However, as I mentioned above, Fundable is one option to consider. You can also explore options that are centered solely on the cannabis industry, such as Fundanna and CannaFundr. These are relatively new options, so it’s important to do your research, explore all associated fees, and know what you’re getting into before signing up.

Alternative Lenders

Alternative online lenders could help you receive the money you need to fund your medical marijuana dispensary. These lenders are typically more flexible to work with than traditional lenders, although interest rates and fees may be higher and terms not as favorable. Alternative lenders provide a variety of financing options for you, including short-term loans and lines of credit.

Before applying, make sure that you choose a lender that works with businesses in the cannabis industry and other high-risk businesses. Some lenders have restrictions on lending to medical marijuana dispensaries, so make sure to choose a lender that is willing to work with you. There are even online lenders that specialize in financing businesses in the cannabis industry.

Personal Loans For Business

If you have a solid credit score and steady income, you may qualify for a personal loan that you can use to finance startup expenses.

This is an option that many startups choose because the revenue, time in business, and business credit score aren’t taken into consideration for loan approval. However, you do have to disclose how the funds will be used. Some lenders may not loan money due to the industry you’re in, so you may have to shop around for a lender willing to work with your situation.

Investors

One way to finance your startup is to find an investor. Seek out private equity firms, venture capitalists, or angel investors that will provide the funds you need in exchange for a stake in your company.

Credit Cards

A business credit card is a good option for any business. A credit card can be used to pay recurring expenses, cover an emergency, or pay for startup expenses. There are plenty of great credit card options for good and fair credit borrowers. If you have bad credit, you may also qualify for unsecured or secured credit cards, although your credit limit will be lower and interest rates higher.

What You Need To Qualify For Medical Marijuana Dispensary Business Financing

The requirements needed to qualify for medical marijuana dispensary financing are similar to requirements for any other type of business.

Your requirements will vary based on the lender you select, as well as the type of financing you seek. For example, applying for a business credit card may require basic information, such as your name, the name of your business, contact information, and annual revenue. Applying for a loan or line of credit may require additional information and documentation.

Before you gather your documents, though, there is some prep work that can be done on your end. Calculate how much money you need for your business. Then, figure out if your business is able to afford the loan.

Next, pull your free credit score online. If you have credit challenges, working to build your credit may help you qualify for more options at better rates. If you’re in a time crunch to receive your financing, there are bad credit loan options available, but you should expect higher fees and interest and a more expensive overall cost of borrowing.

Once you’ve established how much money you need (and can afford) and where you stand in terms of credit, it’s time to start shopping for lenders. After you’ve narrowed down your selection, understand the requirements of each lender. Again, this varies but you should generally expect to present the following:

• Personal Information: Name, Social Security Number, and contact information
• Business Information: Business name, address, and Federal Tax ID
• Business & Personal Credit Score
• Personal Background Check
• Business Licenses & Permits
• Business & Personal Bank Statements
• Profit & Loss Statement
• Income Statement
• Balance Sheet
• Detailed Business Plan

Final Thoughts

Operating or opening a medical marijuana dispensary comes with its challenges. While many options available to other businesses aren’t open to you, this doesn’t mean that you won’t be able to find financing. With a little research and creativity, you can find a lender that is willing to work with you to help make your business a success.

Want to get started with a loan for your medical marijuana business right away? Try LoanBuilder.