In September 2021, less than three years after adult-use sales began, the Massachusetts cannabis market passed a major milestone: Adult-use gross sales surpassed $2 billion. The explosion of the industry has naturally enticed a lot of business owners and prospective business owners to go all in on cannabis. There’s a ton of opportunity in the market—but there’s not a ton of opportunity around financing. Cannabis business owners just don’t have a lot of places they can go to get a loan outside of hard money lending and personal connections. 

Challenges Around Cannabis Lending

For a new cannabis business, the central obstacle to financing is the fact that cannabis is still illegal on a federal level. Financial institutions risk regulatory consequences if they engage with businesses that profit from federally illegal activities. As a result, almost no financial institutions will do business with these companies. Even in states where cannabis is legal, licensed businesses that cultivate and/or sell it generally can’t access any traditional banking services. 

The SAFE Banking Act of 2021 was introduced last year to expand banking options for legal cannabis businesses. It would prohibit federal banking regulators from penalizing banks and other financial institutions for working with these businesses. Passage of the SAFE Act would make it easier for new cannabis businesses to enter the marketplace, as well as remedying some of the safety issues these businesses face because they’re forced to handle so much cash. The House has voted to pass the SAFE Act six times, most recently in February 2022, but the Senate has yet to pass it.

Until financial regulations change, traditional lenders aren’t going to be a financing option for the vast majority of cannabis businesses. There are only a few banks here in Massachusetts that will even allow a cannabis business to open a bank account. Getting a cannabis business loan from a Massachusetts bank just isn’t an option unless the SAFE Act passes.

Andrew Kazakoff has seen firsthand how limited the financing options are for legal cannabis businesses. Andrew operates Fiscus Funding, which makes short-term loans to licensed cannabis businesses. He has valuable experience on both the lending side and the corporate side of the industry: Andrew also operates a licensed cannabis extraction facility in Massachusetts called Fathom Cannabis, producing all-natural products. 

He says that only the largest cannabis companies in the U.S. are ever able to secure funding from banks and hedge funds, and even then those companies are paying interest rates in the range of 8 to 10 percent. “Everyone else, if you’re not one of the 10 largest [cannabis] companies in America, the only option for financing is friends and family, personal money and private lenders,” he says.

Financing Options: Personal Loans and Hard Money Lending

Let’s say you want to start a cannabis business from scratch. It’s highly unlikely that you’re going to find any investor or lender willing to finance your start-up costs unless it’s someone who has a personal interest in your success, like a family member. (One of the arguments for the passage of the SAFE Act is that it will bring more social equity to the cannabis industry by allowing people without personal or family wealth to access money for start-up costs like licensing and real estate.)   

Assuming you’re able to use personal sources to cover those early costs, the next challenge is securing financing for the bigger costs to come, like construction, capital expenditures and salaries. This is where hard money lending often comes in.

Private lenders can use hard money lending to make short-term loans to borrowers. Hard money lending is a type of asset-based lending, generally using real estate or other real property as collateral. These lending arrangements allow entities like Fiscus Funding to help licensed cannabis businesses bridge the gap between their first round of funding and the completion of their project. “What this looks like is, the company is fully licensed, they have everything set in place, now they have to start their hard costs,” Andrew says. “We help companies finish construction and get to profitability.” 

Of course, every cannabis business is unique—so speak to your business attorney to assess whether there are other funding avenues that might be open to you. For example, let’s say a principal in a cannabis business has significant real estate holdings and a sizable securities portfolio. Traditional lenders might be willing to make a loan using the principal’s real estate and securities as collateral.

What Else Do New Cannabis Businesses Need to Know? 

• Real estate is usually the first hurdle. Before you think about financing options or applying for a license, find a physical location for your future business. “You need a piece of real estate in order to get a cannabis license. Cannabis licenses don’t just float,” Andrew says. “They’re connected to the real estate and to the person.” Finding a piece of real estate for your business can be extremely difficult. Many landlords don’t want to lease space to cannabis businesses. Zoning laws and the rules of your specific town or neighborhood will restrict your choices too. 

• Speed is critical (but the process is slow). “There’s an extreme value in cannabis to getting open faster,” Andrew says. “Companies that get open faster are more profitable. The longer it takes you to open, the more money that you’re burning.” Of course, regulatory issues make that easier said than done. Some cannabis clients here in Massachusetts have been actively working toward opening for more than four years, but a constantly shifting regulatory landscape has caused delay after delay. If you’re thinking about entering the cannabis industry in the next few years, call your business attorney as soon as possible to talk about the first steps. 

• Don’t overvalue your license. Getting a cannabis license is obviously important, but it’s not a guarantee that you’ll ever be able to generate revenue. Andrew says that a lot of companies are able to get a license but can’t get past the next hurdles. “Getting a license is one thing. Building out a facility is much more valuable. That’s what I’m trying to educate people on. They think that their license is worth so much because they see people selling licenses for so much, but it’s only worth a lot when you’ve actually built out the asset.” 

• Be wary of lenders that ask for too much. Because cannabis businesses have limited options for financing, some lenders have adopted predatory practices. Others offer terms that aren’t in compliance with regulatory agencies (such as the Cannabis Control Commission here in Massachusetts). Work closely with your business attorneys to evaluate the terms of any lending arrangement. 

• Don’t expect to get rich quick. Because the cannabis industry has experienced explosive growth over a short period of time, some people are jumping in with unrealistic expectations. “A lot of people tell me that their business is worth $10 million and they’ve only put in $200,000. There’s no scenario where you’ve only put in $200,000 and it’s worth $10 million,” Andrew says. In other words, you won’t see significant earnings without a significant investment. “The guy you see selling for $10 million, he put in $5 million. And the guy you see selling for $5 million, he put in $2.5 million.” 

While the financing challenges associated with launching a cannabis business may be discouraging, there’s still tremendous opportunity in the marketplace right now. “It’s a very, very profitable business,” Andrew says. “The economics make perfect sense. But you have to be intelligent and reasonable.” 

You also have to have advisors who are familiar with the cannabis landscape and can help you navigate its complexities. Sassoon Cymrot, LLC’s business attorneys have represented both lenders and borrowers in cannabis financing arrangements. If you have questions about hard money lending or starting a cannabis business, we’re happy to help. Contact us today.