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 the recreational use of 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, because of which cannabis businesses have a hard time acquiring capital to launch and grow their businesses. Oftentimes, they rely on personal loans and investments, but cannabis lending as a business has begun to gain traction in the last five years.
Matt Hawkins, founder of Entourage Effect Capital, a cannabis lender, says that there are few cannabis lenders in the space to begin with, and that traditional lending in the cannabis industry doesn’t exist because of the federal illegality of cannabis. He says most financial institutions that are FDIC-insured do not provide lending services to the industry, so the cannabis industry has no real low-cost lines of credit and no working capital lines that most industries have access to.
Hawkins says the most common type of financing in the cannabis lending industry is private equity investment. 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.
Equity financing has its pros and cons. To begin with, there’s no loan to repay, which allows the business to utilize its existing funds in a way that grows the business, and it mitigates any credit issues the business might have. However, sharing control of the business might be a problem for some, especially if there’s a difference in vision in growth and management styles — and if too much equity is given up, owners run the risk of losing control of the company.
Pioneer Valley Extracts is a Massachusetts-based cannabis business whose products include vapes, chocolates and gummies. Brother-sister duo Kristen Mara and David Cichocki run the business together, having made a mix of personal and equity investments to grow the business. Cichocki says not a lot of lenders are willing to lend unless the business gives up equity.
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