Interest in Cannabidiol, commonly known as CBD, has skyrocketed in recent years as people have turned to this cannabis-derived substance for a variety of medical ailments. While the FDA has approved CBD as a treatment for seizures caused by two forms of epilepsy, many use CBD to treat a variety of different conditions from anxiety to pain disorders, though the FDA has not yet approved it as a treatment for these conditions. Nonetheless, the 2018 federal legalization of hemp and hemp-derived products (with restrictions) has sparked a boom in CBD-related commerce.
Unfortunately, an opaque thicket of legal and regulatory complications still makes it difficult for a CBD business to get approved for a loan. In this article, we’re going to delve into the factors that complicate a CBD business’s quest for funding and help direct you to the types of loans a CBD business can qualify for â and where to look for them.
Why Most Lenders Refuse To Loan To CBD Businesses
If you’re running a CBD business, it can be hard to obtain a business loan. You’ve likely already discovered this if you have a CBD business, and you’ve tried to secure funding for it.
Until the enactment of the 2018 Farm Bill, hemp (which legally must contain 0.3% or less of THC, the psychoactive component of cannabis that produces the “high”) was just as illegal in the US at the federal level as psychoactive cannabis, as the Controlled Substances Act did not differentiate between the two. This means that until just two years ago, it was illegal for federally-insured financial institutions to lend to sellers of CBD, despite the existence of various state laws establishing state-legal markets for both CBD- and THC-containing products.
Even though growing and cultivating hemp has been fully legal for two years, lending institutions haven’t built up much institutional memory when it comes to navigating the complexities that still exist surrounding the sale of products derived from the Cannabis sativa plant. Hence, many banks still shy away from lending to CBD companies, while other lenders might deal with some sectors of the CBD industry but not others.
Regardless of the headaches involved, it is possible for you to get a loan for your CBD business. Let’s discuss the types of loans best suited for companies dealing in CBD products.
Best Types Of Loans For CBD Businesses
The type of loan you’ll want to look for will depend on the kind of expenses you intend to put the money toward. Let’s discuss the different types of loans a CBD business would typically pursue.
With an equipment loan, the equipment you use the loan to buy is used as collateral for the loan. If you’re in the business of growing hemp, you may need an equipment loan to purchase machines to harvest and extract the flower. If yours is a smaller boutique operation, and you want to grow indoors, you could use an equipment loan to purchase grow lights, inline fans, and other hydroponic supplies. Once you’ve fully repaid the loan, the equipment will be yours to keep. However, if you default, say goodbye to the supplies.
Merchant Cash Advances
A merchant cash advance can be a good option for a CBD startup without any business history or a CBD business struggling to qualify for a traditional business loan. Merchant cash advances provide you with a short-term cash infusion. In exchange, you repay the advance either by sending the lender a percentage of your sales on a daily basis (though some providers may let you pay on weekly or monthly) or by repaying a fixed amount on a daily (or weekly/monthly) basis.
Merchant cash advances are not typically recommended as an option of first resort due to the pricey fees charged and the fast repayment required. But for the CBD business unable to qualify for a traditional loan, a merchant cash advance can be a workable short-term funding solution.
Lines Of Credit
If you don’t need a large lump sum of cash and instead want a credit line you can draw from similar to a credit card, a business line of credit may work for your CBD business.
With a revolving line of credit, the total amount you can borrow (referred to as aÂ credit facility) gets replenished as you repay the money you’ve actually borrowed. This way, you only borrow the money you need while keeping a financial safety net in place that you can draw from should a pressing need arise. The main caveat here is that a line of credit can be difficult to qualify for â perhaps even harder to qualify for than a traditional business loan. CBD businesses with at least six months of business history are much more likely to qualify.
We’ve discussed alternatives to “regular” business loans here, but depending on where you look (we’ll get to that part in a moment), you may, in fact, be able to qualify for a traditional business term loan.
You might be looking to expand your operations significantly or engage in other money-intensive projects. In that case, a term loan will cover your needs more effectively than some of the “alternative” types of loans, many of which involve smaller amounts of money and shorter repayment terms. Of course, without any business history, traditional business loans are quite difficult to obtain, so CBD startups may need to look for another type of funding.
Where To Find CBD Business Loans
As I’ve mentioned, banks tend to be skittish when it comes to dealing with anything related to the historically-stigmatized (not to mention criminalized) Cannabis sativa plant. If you have a good working relationship with your current bank, you may want to discuss the possibility of getting a loan for your CBD business with them, particularly if they have a track record of being progressive on other issues. Don’t be surprised if they turn you down, however â and if you have reason to believe that even broaching the subject with your bank might jeopardize your existing relationship with them, skip this step altogether and look elsewhere for funding.
As it happens, you’re much more likely to find an online lender willing to work with your CBD business. Try seeking a loan from one of the following online sources:
A simple online search will turn up a number of companies offering funding for qualifying cannabis-related businesses. While some of these lenders specialize in recreational or medicinal marijuana and not CBD businesses specifically, they may still be willing to work with you. Contact a cannabis lender to see if yours is the sort of business they’d like to work with (and vice versa).
Other online lenders offer loan products to borrowers considered “high-risk.” These lenders may be more likely to lend to you than your standard online lender. Read our article about high-risk business loans to get a better idea of this part of the lending industry.
Some online lenders specialize in crowdfunded loans. Getting a crowdfunded loan â also known as peer-to-peer (P2P) lending or debt crowdfunding â involves having a lending platform offer your proposed loan terms to a crowd of loan investors. You then pay back these investors with interest.
Individual investors may be more inclined to work with a CBD business than larger, more cautious lending institutions. That’s why debt crowdfunding sites are worth checking out for owners of CBD businesses. Check out our explainer piece on debt crowdfunding to learn more.
How To Make Sure Youâre Getting A Good Deal
Unfortunately, there are plenty of shady business loan servicers out there that gravitate toward businesses considered high-risk. To assess whether a given lender is legitimate and whether the loans they offer are reasonable, you’ll need to do your due diligence:
Check The Lender’s Online Presence
Any fly-by-night outfit can create a cheap website touting its lending services. A genuinely convincing online presence is harder to fake, however. Check for any social media accounts associated with the company. Search for news articles and press releases that mention the company. Look at the company’s About page on its website (it should have one!) and see if it seems legit. See if you can find names and/or profiles of the people who run the company. Lastly, look for user reviews and comments about the company. While most every lender has its detractors, you should find at least some evidence of a legitimate company by reading customer feedback.
Examine The Full Cost Of Borrowing
When considering a lender’s loan products, it’s important to look at more than just what your monthly payments will be. Look out for any extra fees you might find yourself on the hook for, including:
- Origination fees
- Closing fees
- Application fees
- Packaging fees
- Referral fees
- Guarantee fees
- Assessment fees
- Prepayment penalties
Check Reviews Of The Lender
It’s always helpful to read a professional reviewer’s opinion of a lender, as you’ll gain insight from the research done on the company’s history and from comparisons to the leading lenders in the field. To that end, check out our full list of small business loan reviews, You can filter your search and get results fitting your business situation by entering your time in business, your credit score, and other factors. Pretty cool, huh?
We’ve also got a handy guide to the top small business lenders of 2020, along with our small business loan comparison chart.
Other Resources For CBD Businesses
Here are some additional resources for those of you in the CBD industry or the cannabis industry more generally. If you’re just starting out or if you want to build up your current operation, have a look!
- Everything You Need To Know About Finding A CBD Merchant Account & The 6 Best CBD Payment Processors
- How To Finance A Medical Marijuana Dispensary
- Need A Merchant Account For Your Medical Marijuana Dispensary?
- Need A High-Risk Merchant Account? Here’s The 6 Best Payment Processors To Work With
- What Are High-Risk Business Loans & Where Do I Get One?
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