Potential cannabis entrepreneurs attending this month’s Hampton Cannabis Expo will seek guidance from a range of business professionals as they navigate the rapidly growing but challenging new industry.
Some of the exhibitors at the event at The Clubhouse in East Hampton from August 19 to 21 will be able to help secure financing, one of the toughest hurdles facing cannabis businesses.
Most banks and other traditional sources of financing 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 this sector usually have to rely on private equity and hard money lenders if they need equipment or capital for day-to-day operations.
The national business capital based in Hauppauge, which will be on display at the Hampton Expo, has been securing funding for cannabis businesses across the country for the past several years.
“There’s no real bank funding out there, so there’s a lot of private lending 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 finance tools.”
And while many cannabis businesses can borrow money from companies like NBC, it is much more expensive than loans provided to non-cannabis businesses.
According to Camberato, for most companies seeking financing for equipment, interest rates range from 5 percent to 8 percent. However, cannabis trading rates can be up to three times the regular rates for financing instruments, which can range from 12 percent to 18 percent.
The same applies when it comes to lending rates for working capital, where non-cannabis businesses can find bank financing for around 6 percent these days and private lending rates for working capital for cannabis businesses range from 15 percent. up 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 leaving equity,” he said.
Courtesy of Neil Kaufman / Kaufman McGowan
Hauppauge-based Kaufman McGowan law firm, another exhibitor at the Hampton Expo, has worked on a number of 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 isn’t really useful as collateral for lending purposes, because you have to have a license to sell that collateral,” Kaufman said. “So even if your debtor defaults and you foreclose, the collateral is worthless in your hands. It is also illegal for you to take possession of it. This is a major hurdle for banks that lend to cannabis companies, because banks Prefer to be completely collateral.”
Still, Kaufman said there are several hedge-fund-type lenders for cannabis companies that have sprung up, mainly coming out of the troubled lending world, where the cost of loans is high.
“A lot of cannabis companies aren’t really making a lot of money and they don’t have much in the way of positive cash flow, even if they have positive EBITDA, because it’s almost an accurate measurement for cash flow for cannabis companies. Not because it is for non-cannabis companies,” he said. “These companies are naturally financially vulnerable, as they are taxed and have weak collateral packages. As a result, when you take all these things into account from a lender’s point of view, you end up charging a higher interest rate to justify the higher risk. So I think we have seen a lot of distressed lenders get involved because they are used to taking risks. ,
NBC has secured loans to cannabis companies ranging from $50,000 to $2 million.
“We’ve probably seen cannabis lending requests grow 10 to 20 percent year over year,” Cambaretto said. “More and more companies are reaching out.”
While Camberato’s firm typically focuses on clients already doing $500,000 to $30 million a year in revenue, new cannabis entrepreneurs looking for seed money won’t qualify. However, hundreds of cannabis startups poised to open in New York next year may or may not be able to receive funding from the state.
“The state has established a $200 million loan fund that they plan to make available to these new licensees,” Kaufman said. “They are planning to lend them money at 8 per cent interest on non-shelter basis. It is very reasonable and there is no personal liability for the business owners. It is going to be a great thing.”