Securing Cannabis Equipment Financing Without Excess Stress
Securing Cannabis Equipment Financing Without Excess Stress
The first order of starting or scaling a cannabis-related business is securing the funding and equipment necessary to produce high-quality cannabis products. Access to the right technology helps cannabis growers, processors, and dispensaries deliver great experiences and build their brands.
However, finding capital for the types of cannabis equipment necessary can be one of the most challenging parts of running a cannabis company. Since traditional business loans may not be an option for those in the cannabis sector, non-bank financial services can be an effective way to make equipment purchases and get operations off the ground. By understanding the financing options available, you can make a smart funding choice that ensures your business has the right supplies for success.
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What is cannabis equipment financing?
Cannabis equipment financing is the process of getting financial loans to buy or lease new or used equipment for a cannabis business. Though cannabis businesses operate in a burgeoning industry, they often face challenges accessing funding from traditional lenders due to the legal complexities surrounding cannabis substance scheduling.
The impending move to lower cannabis to a Schedule III substance, as well as the potential future passage of the SAFER Banking Act, may soon give cannabis businesses and banks a smoother path to operation. Until then, a cannabusiness may need feasible alternatives to access capital to fuel operations.
With cannabis equipment loans, dispensaries, growers, and related businesses can acquire cultivation systems, lighting, security setups, and more without paying the full cost upfront. Securing financial support is crucial to facilitating growth and developing operational efficiency within the rapidly expanding legal cannabis market.
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How Order.co approaches cannabis financing
Order.co gives cannabis-related businesses access to the capital and purchasing power to launch and grow a successful cannabis business. Using the purchasing platform and access to Order.co Financial Offerings preferred advances and extended net terms, cultivators, processors, and dispensaries can buy the equipment and supplies they need for daily operations without incurring additional fees or higher interest rates.
Here’s how it works:
- A cannabis business signs up with Order.co and onboards its preferred vendors to purchase equipment and supplies. Don’t have a vendor for a specific item? The platform features thousands of high-quality suppliers for the new equipment your business needs.
- Order.co provides buyers with flexible net terms through an easy verification process. Unlike a traditional bank loan or line of credit (LOC), Order.co acts as the vendor of record. This allows cannabis companies to get supplies while avoiding the restrictions of traditional lending.
- For businesses that need access to capital, Order.co Financial Offerings provides up to $500,000 of working capital to fund purchases.
Order.co's extended terms and preferred advances help businesses get the equipment and supplies they need to start generating revenue. These financial offerings help growing companies balance their cash flow, leverage lending effectively, and build their business without red tape or limitations.
What are the requirements for obtaining traditional cannabis financing?
Despite recent legal moves to change the Federal Drug Schedule designation, cannabis remains a Schedule I controlled substance. That makes financing a tricky enterprise. While it’s not illegal to fund a cannabis business through loans, the risk profile makes many traditional lending agents and institutions think twice.
If you want to pursue traditional financing, you need to have:
1. A strong personal credit report
Every loan considers your credit score as part of the application process, and cannabis loans get an extra-close inspection. A 670 or above is in the “good” category and is usually the minimum to be considered for a high-risk loan.
2. A well-established credit history
Credit isn’t just about good behavior—it's about a good track record as well. A strong credit score and a long history of timely repayment increase your chance of securing funding.
3. No bankruptcies
Any indication a borrower might default can be a major roadblock to getting a loan, especially in high-risk lending. While advice online says bankruptcy merely “might” be a decision-making factor, it’s fair to say a rocky credit history can make or break your application.
4. A separate business account
Funds for a cannabis business (as with any business) must be separate from other sources of revenue. With cannabis, the separate account becomes part of the reporting and regulatory requirements of applying for financing. Establish a business account under your business taxpayer identification number (TIN) along with any state filing requirements or permits.
5. Citizenship or legal resident status
The nature of cannabis products makes US citizenship or residency a requirement for borrowing funds. Since regulations concerning lending and business permits for cannabis businesses may vary, you will want to talk to an attorney for up-to-date, accurate information if questions about citizenship could impact your loan.
6. A business plan
When in doubt, write it out. Create a documented business plan with projected revenues, a mission statement, a SWOT analysis, and marketing plans as an addendum to your financing application.
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Types of equipment cannabis businesses need
Starting and scaling a cannabis operation comes with its share of growing pains, and even small businesses in the cannabis industry have significant equipment needs. While launching a business like a dispensary storefront may seem straightforward, a lot goes into everything from building a functional backroom to maintaining an efficient production floor. The costs to start a dispensary vary widely, with some sources reporting a range of $250,000 to $750,000 and other estimates climbing as high as $2M in high-cost locations.
A few of the tools required for growing, processing, finishing, and selling cannabis products include:
Growing equipment
- LED grow lights
- Watering/irrigation equipment
- Hydroponic systems
- Nutrient dosing systems
- HVAC and climate control systems
Processing equipment
- Trimming machines
- Drying racks and cure boxes
- Extraction equipment
- Rosin presses
- Distillation equipment
- Waste disposal systems
- Testing and analysis equipment
Finishing and retail equipment
- Packaging machines
- Labeling equipment
- Point of sale (POS) systems
Challenges of obtaining cannabis equipment financing
Federal prohibition of cannabis presents a major stumbling block to businesses operating legally within state statutes. Although some individual states support and benefit from cannabis sales for recreational and medicinal use, banking institutions must follow federal banking laws in administering loans. This makes it harder for cannabis businesses to get financing for their operations.
Two specific banking acts prevent most institutions from offering competitive loans to cannabis-related industries: the Anti-Money Laundering Act (AML), which requires banks to report suspected money laundering or illegal activities, and the Bank Secrecy Act (BSA), which requires them to report all transactions over $10,000 and all transactions involving cannabis and other scheduled substances.
Because of these complexities, many lenders refuse to participate in cannabis-related loans. Those that do, including smaller institutions like credit unions, often charge higher rates or holding fees to reflect the increased risk.
Cannabis equipment financing strategies: pros and cons
Choosing to finance the purchase of cannabis equipment is a pivotal decision for many cannabis business owners, as most lack the upfront capital to buy these essential tools outright. Cannabis financing allows borrowers to secure the machinery and technology necessary for efficient operations that comply with legal regulations.
However, while financing programs can offer payment plans and better cash management, they may also come with interest expenses and long-term debt. Weighing the pros and cons of business financing is essential for cannabis companies looking to grow in a competitive market.
Benefits of financing cannabis equipment
- Access to the latest technology: Financing can increase access to advanced equipment, ensuring companies stay competitive and compliant.
- Flexible payment terms: Financing can provide flexible payment options tailored to match cash flows.
- Improved cash flow management: Financing helps reduce large capital expenditures to manageable payments.
- Easier budgeting: Fixed financing payments facilitate better budgeting and financial planning.
Drawbacks of using financing to secure cannabis equipment
- Interest and fees: Financing solutions often come with high interest rates and fees that significantly increase the cost of ownership.
- Equipment obsolescence: The pace at which technology changes increases the likelihood that a dispensary will be stuck with outdated and inefficient equipment.
- Strict eligibility criteria: Some cannabis businesses may struggle to qualify for financing due to stringent eligibility criteria.
- Potential for repossession: In default cases, financed equipment is at risk of repossession, disrupting operations and leading to additional financial losses.
Long-term commitment: Financing locks businesses into long-term payment schedules, limiting flexibility in an industry known for rapid changes and regulatory shifts.
Should you lease cannabis equipment?
Cannabis equipment leasing presents an appealing alternative for cannabis companies looking for financial flexibility and reduced upfront costs. However, leasing options also have challenges, including higher long-term expenses and contractual obligations.
Benefits
- Lower initial costs: Leasing equipment generally requires less initial capital than purchasing, making it more accessible for businesses with limited upfront funds.
- Flexibility: Leasing agreements often offer the flexibility to upgrade or change equipment, which is particularly beneficial in the rapidly evolving cannabis industry.
- Tax advantages: Lease payments can sometimes be deducted as business expenses, offering tax benefits.
- Maintenance and repairs: Depending on the lease agreement, maintenance and repairs may be covered or managed by the lessor, reducing operational burdens.
Drawbacks
- Higher long-term cost: While leasing offers lower upfront costs, the total expense may exceed the cost of purchasing equipment outright.
- Contractual obligations: Lease agreements come with fixed terms that might not always align with the state of the business, potentially leading to wasted resources.
- Lack of ownership: At the end of a lease term, the business has no equity or ownership in leased equipment.
- Limited customization: Leased equipment often cannot be modified or customized to meet operational needs.
- Higher insurance costs: Some leasing companies require additional insurance coverage, increasing operational expenses.
Case Study: How Standard Wellness unlocked cash and free time
There’s always something to order or coordinate in a cannabis business, especially when that business cultivates, processes, and dispenses its product. This is the case for Ohio- and Utah-based Standard Wellness, and the company needed a way to streamline its processes, take care of the bottlenecks, and access financing.
Standard Wellness partnered with Order.co in Spring 2022 to help align its ordering and approvals process. The company also took advantage of the capital advance and net terms options it couldn’t find through traditional means. The partnership allowed Purchasing and Procurement Coordinator Mikey Haverman to recoup valuable time previously spent chasing orders and open up better cash flow opportunities to fuel growth.
Says Mikey, “Having one centralized place that has all of the orders in it with the vendor numbers and the tracking is extremely helpful.” Even better, Standard Wellness was able to leverage the financial benefits quickly and easily. When the company needed to purchase a flower-filling machine, purchasing it using traditional financing proved difficult. Order.co helped them overcome the challenge, “We were able to secure the cash in two days,” Mikey explains.
As a result of the partnership with Order.co, Standard Wellness now pays just one invoice a month, saving 10 hours of manual work per work while doubling its ROI in cost savings. They’ve even used extended net terms to gain an additional 30 days to pay vendors. These increases in time and flexibility allow Mikey to turn his attention to other projects and growth strategies.
Get better cannabis equipment financing options with Order.co
If you’re a cannabis-related business intent on fast and sustainable growth with less frustration, Order.co can provide access to preferred vendors, competitive pricing, and excellent purchase and payment options. Order.co makes it easier for cannabis businesses to get up and running or refine their existing procurement process. With help from our software, you can also unlock capital advances of up to $500K and enjoy extended net terms of 30, 45, or 60 days for all purchases.
If you want access to capital and purchasing support to grow your cannabis business, schedule a demo of Order.co to learn more.
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