With the cannabis market set to double, lenders hope to capitalize on the opportunity
- Financing in the space typically has come in the form of equity investments.
- Federal deregulation would give more lending options to cannabis businesses.
With the cannabis market expected to double by 2025, the industry hopes to grow and operate without its hands tied behind its back. One of the biggest challenges is offering cannabis businesses a range of financing options that make sense for their growth.
George Mancheril, CEO of Bespoke Financial, a cannabis lending fintech, says that the cannabis market has grown leaps and bounds in the last 5-10 years, from legalization in a handful of states to 17 in 2021. New York was the most recent state to legalize cannabis at the end of March.
Despite the fact that two-thirds of Americans support the legalization of marijuana, the substance is still federally illegal. Consequently, most financial institutions that are FDIC-insured do not provide lending or banking services to the industry which prevents cannabis businesses from acquiring capital to launch and grow. Consequently, businesses sometimes rely on personal loans and investments.
Matt Hawkins, founder of Entourage Effect Capital, a private investment firm, says the cannabis industry has no real low-cost lines of credit and no working capital lines that most industries have access to. This is where cannabis lenders come in, but Hawkins says that there are few of those to begin with. Most lenders in the space will commonly lend against a company’s assets, such as real estate, to act as collateral for the loan. However, private equity investment is the most common type of financing. Since EEC’s founding in 2014, the company has made 65 investments in the industry, 90% of which have been through equity or equity-like instruments.
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