As the cannabis market is expected to double, lenders hope to seize the opportunity – Tearsheet
With the cannabis market set to double by 2025, the industry hopes to grow and operate without hands tied behind their backs. One of the biggest challenges is providing cannabis companies with a range of financing options suited to their growth.
George Mancheril, CEO of Bespoke Financial, a cannabis lending fintech, says the cannabis market has grown by leaps and bounds over the past 5-10 years, from legalization in a handful of states to 17 in 2021 New York was the newest state. 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 illegal at the federal level, due to which cannabis companies struggle to acquire capital to start and grow their businesses. Often times they depend on personal loans and investments, but cannabis lending as a business has started to gain traction over the past five years.
Matt Hawkins, founder of Entourage Effect Capital, a cannabis lender, says there are few cannabis lenders in the space to begin with, and traditional lending in the cannabis industry does not exist due to of the federal illegality of cannabis. He says most financial institutions that are FDIC insured do not provide industry lending services, so the cannabis industry does not have real low cost lines of credit or lines of credit. working capital that most industries have access to.
Hawkins says the most common type of financing in the cannabis lending industry is private equity investing. Since the creation of the EEC in 2014, the company has made 65 investments in the sector, 90% of which through equity or equity-like instruments.
Equity financing has its advantages and disadvantages. For starters, there is no loan to repay, which allows the business to use its existing funds to grow the business, and it alleviates any credit problems the business might have. However, sharing control of the business can be a problem for some, especially if there is a difference in vision in growth and management styles – and if too much equity is given up, the owners run the risk. to lose control of the business.
Pioneer Valley Extracts is a Massachusetts-based cannabis company whose products include vapes, chocolates, and gummies. Brother-in-law 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 few lenders are willing to lend unless the company gives up its equity.
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