Budding cannabis entrepreneurs attending this month’s Hampton Cannabis Expo will seek guidance from a host of business professionals on navigating the fast-growing but challenging new industry.
Several exhibitors at the event, scheduled for August 19-21 at The Clubhouse in East Hampton, will be able to offer help on how to secure financing, one of the most difficult hurdles facing cannabis businesses.
Most banks and other traditional funding sources will not lend money to cannabis companies for a number of reasons, not the least of which is that cannabis is still illegal at the federal level. So businesses in the sector typically have to rely on private equity and lenders if they need capital for equipment or day-to-day operations.
Hauppauge-based National Business Capital, which will be exhibiting at the Hampton show, has been providing financing to cannabis businesses across the country for the past several years.
“There’s no real bank financing, so there’s a lot of private lending going on in the space,” says Joe Camberato, founder and CEO of National Business Capital. “There are still limited lenders, but we have been able to help cannabis companies access capital and financial equipment.”
And while many cannabis businesses can borrow money from companies like NBC, it’s much more expensive than loans to non-cannabis businesses.
For most companies looking for equipment financing, interest rates range from 5 percent to 8 percent, according to Camberato. However, rates for cannabis businesses can reach three times the usual equipment financing rates, ranging from 12 to 18 percent.
The same is true when it comes to working capital loan rates, where non-cannabis businesses can get bank financing for around 6 percent these days, and private working capital loan rates for cannabis businesses vary from 15 to 18 percent.
But Camberato points out that alternative sources of capital can cost even more in the long run.
“The only funding that was out there was private equity funding, and if you have an established business, it’s still a lot cheaper than giving up equity,” he said.
Another exhibitor at the Hampton show, Hauppauge-based law firm Kaufman McGowan, has worked on several secured loan deals for cannabis companies. Attorney Neil Kaufman, the firm’s founder and managing partner, says there are challenges for banks and other lenders in lending to cannabis companies.
“Inventory collateral is not really useful as collateral for lending purposes because you have to be licensed to sell that collateral,” Kaufman said. “So even if your debtor defaults and you foreclose, the collateral is worthless in your hands. It’s even illegal to own it. This is a major obstacle for banks lending to cannabis companies because banks like to be fully collateralized.”
However, Kaufman said there are many hedge fund-type lenders to cannabis companies that have emerged, primarily coming from the distressed world of debt lending, where the cost of debt is significantly higher.
“A lot of cannabis companies don’t really make a lot of money and they don’t have a lot of positive cash flow even when they have positive EBITDA because it’s not an accurate measurement of cash flow for cannabis companies as it is for non-cannabis companies” , he said. “These companies are simply inherently weaker financially because of the tax burden on them and they have weaker collateral packages. As a result, when you take all of these things into account, from the lender’s perspective, you have to charge a higher interest rate to justify the higher risk. That’s why I think we’ve seen a lot of distressed lenders get into it more because they’re used to taking risk.”
NBC has provided loans to cannabis companies from $50,000 to $2 million.
“We’ve probably seen cannabis loan applications grow 10 to 20 percent year over year,” Camberato said. “More and more companies are reaching out.”
While Camberato’s firm typically focuses on clients already generating $500,000 to $30 million in annual revenue, new cannabis entrepreneurs looking for seed money would not qualify. However, the hundreds of cannabis startups poised to open in New York next year may be able to find state funding.
“The state has created a $200 million debt fund that they plan to provide to these new licensees,” Kaufman said. “They plan to lend them money at 8 percent non-recourse interest.” This is very reasonable and without personal liability to the business owners. That will be a great thing.”