While marijuana is currently illegal on a federal level, it has become one of the most exciting industries in the US as it gradually becomes legal in several states, attracts investments, and is capable of using various technologies extending from the internet of things to the cloud and analytical tools.
For most states in the US, medical marijuana programs are severe as alternative means to traditional medicine for treating a variety of health issues., such as neurological and psychiatric disorders and pain control. The cannabis industry has been stated to be the next massive legal recreational substance after alcohol, caffeine, and tobacco. Alongside the US, Canada has also been another country that has been leading the way with the development of the cannabis industry.
Recent research has even revealed that there are hundreds of uses for cannabis and hemp beyond the medicinal and recreational usage intended by most. Plenty of complementary industries within the agricultural, technological, and service sectors are supporting the oncoming growth of the cannabis industry.
With all of that said, plenty of entrepreneurs are interested in becoming a part of this young yet growing industry. The amount of cash flowing in this industry is astounding and guaranteed to may anyone successful if they play their cards right. However, dispensary owners need to be aware of is the impact it has on business interests.
The cannabis industry is far more restricted than other industries out there. The sheer amount of red tape a person needs to go through to open a business dispensary can be challenging. Since the industry is not federally legal, it introduces several setbacks that most entrepreneurs could be wary of dealing with. That is why you need to know how opening up a dispensary of your own could potentially impact your other business interest.
Let us go through what you need to know about the potential impact it could have on your other businesses.
Generally speaking, a business interest expense can be labeled as any interest associated with a loan that is used to pay for a business operation or associated expenses. The central focus of a business interest expands, and there the importance stressed on its classification, is the capability for the expenses to be deductible.
Loan interests are typically deductible, and the loan needs to be used for either buying assets for the business or to pay for business expenses. If any percentage of the loan is used for anything non-business-related, then the amount of deductible interest from the loan needs to be reduced proportionately. For instance, any investment interest would not be counted as a business interest expense and not be deductible under the tax laws for interest expense deductibles.
Something that surprises potential dispensary owners is the fact that acquiring conventional funds is not possible due to legal regulations concerning cannabis. Even states like California, which has a growing legal industry for recreational use and have dispensaries almost everywhere, are prohibiting small business loans for any cannabis business from banks and credit unions.
Regardless of how legal cannabis has been made in your state, it is still considered illegal on a federal level, which means you will not be able to reach out to traditional lenders for assistance in setting up your dispensary. However, new options have appeared for cannabis business loans to provide for upcoming businesses. To understand how your business interest is impacted, you need to be aware of this specific knowledge before attempting to secure a cannabis business loan.
Why is it so difficult?
The amount of states legalizing medicinal and recreational usage of cannabis has grown steadily over the years. That has led to many entrepreneurs eager to open up a cannabis business and become a part of the booming industry. With the massive movement surrounding the decriminalization of cannabis, finding financial assistance would be easier for states that have legalized it.
Unfortunately, that is not the case. As a potential business owner for a dispensary, bank and credit unions will shut their doors by the sheer mention of anything cannabis-related. It can be challenging for dispensaries to obtain a bank account at a federally insured bank or credit union. Again, because cannabis remains illegal on a federal level, receiving financing through a small business loan is impossible since financial institutions are not legally allowed to handle capital that is connected to cannabis.
While it is possible to receive the money, you need one way or another, but you still need to get a bit creative rather than merely walking into a nearby bank and applying for a business loan. While financing options do exist, business owners need to proceed with caution to prevent any issues with federal law.
For example, Commercial lenders are capable of lending you the finances you need for your dispensary if you know where to find them. However, this option is relatively new since the first licensed commercial lender focused on the cannabis industry first appeared in 2018, so there is a chance you may not find one in your area.
So what are the benefits for my interest?
When a business owner is turned down by traditional financing sources, such as banks and credit unions, account receivable financing products become an optional choice. The swiftness of gaining access to capital along with the flexible credit requirement makes it an excellent financing option for many upcoming dispensary operators. So, deciding on a suitable cannabis business loan for your dispensary operation requires a bit of research on your side and deciding if the options are worth it.
Furthermore, you can receive a cannabis business loan even if you have bad credit. Businesses can receive approved funding with invoice financing, along with a Business Cash Advance even if your credit is terrible. Asset-based financing has a much sturdier stance when dealing with credit. So that it can be an attractive option if you are that type of business that invoices customers regularly. Business Cash Advance is willing to accept terrible credit, but your terms will be impacted based on your personal credit, with so many businesses having to weigh the options they receive carefully.
Types of financing options
The type of financing you have available for starting a dispensary are debt funding and equity funding. Debt funding usually involves financing your own business through either taking out loans or using a business credit card. The lender needs to be paid back the original amount loaned to you plus interest.
Equity funding usually involves offering shares of the business in exchange for capital. The investor shall receive their money back in the form of dividends or profit when the dispensary is sold. Since equity funding usually assumes that the business needs working capital to exist and holds value, debut funding through loans and credit methods credit is the method cannabis owners need to use to fund their businesses at the start of their operation. Cannabis dispensaries loans will fall under four diverse categories: dispensary cash advances, private loans, equipment leasing loans, and real estate loans.
Dispensary cash advance
Dispensaries have a challenging time with receiving funding, so cash advances are the best viable option. Cash advances are not considered a loan, and to receive one, the dispensary needs to show a robust revenue. Factor rates vary from 1.30 to 1.49, and terms vary from four to twelve months.
Funding is given to you quickly, using within one or two days. If you require quick cash on a short-term basis, it could be an option. Although some cash advances are usually a far more expensive way to fund your dispensary, so make sure not to use them unless you have no other option.
Private loans are offered by non-bank lenders and usually offer rates somewhere between 8% to 25%. Lending terms are ordinarily for one to three years, and funding is customarily available in seven to fourteen days. While lenders prefer to focus on business funding for growers and manufacturers, they make exceptions for dispensaries that have established revenue. Private loans mostly come from venture capital firms, which can be an issue due to the challenges presented with connecting to these firms.
Specialized funding is also offered, particularly for growers who require money for farming equipment. Equipment leasing is more popular with growers who need equipment but do not want to purchase them outright. The leases can hold interest rates around 8% to 20% and are funded through one to seven years. The leases become available in five to fourteen days.
Real estate loans
If you are attempting to purchase land for growing cannabis or real estate in which to house your business, a real estate loan could be a possible option for you. Hard money loans, bridge loans, and shorter-term mortgages are all offered to cannabis companies and medical marijuana dispensaries. The interest rate is generally around 8% to 20% and terms one to five years in length. Funding can take somewhere between thirty to sixty days to acquire from the time of application.
Depending on the methods you use to acquire a loan for your dispensary operation, your interest rate could be impacted minimally or severely. While banks may not directly loan you the cash necessary for your dispensary, you do have access to your reserves. Meaning you could use the money acquired from the success of your other businesses and place them into running a dispensary.
Keep in mind the information provided here when taking the tie to consider the way a dispensary can impact your other business interest.