Lenders specialized in financing cannabis processing are an alternative to venture funding that typically costs you equity in your own company.
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The cannabis extraction business is burgeoning, with existing firms working to gain market share and innumerable potential firms looking to enter the marketplace.
Regardless of the precise stage a business has reached, wisely investing in top-of-the-line extraction equipment might well be the most important prospective capital expenditure any cannabis brand or manufacturer will make. Extraction equipment is expensive, highly specialized and newly improved technological iterations are introduced at a frenzied pace.
Scaling while staying technologically current is a huge challenge that requires effective financing of modern equipment and technology. Arranging for that financing via conventional avenues, cannabis companies soon realize, is no easy task. Extraction firms quickly learn that accessing traditional debt markets — particularly bank loans — is difficult, if not impossible.
The business can consider equity capital raises ranging from an initial friends and family round, to a substantial venture capital-backed funding series. While there’s no question that equity funding can be both vital and beneficial for cannabis firms, there are drawbacks. Companies can anticipate elevated discount rates demanded as compensation for perceived high risk. Post-money capitalization structures will virtually always be dilutive and in many cases, proposed dilution is so substantial that it jeopardizes ownership control.
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Finally, there’s likely a misalignment between the time horizon of equity investments, which are frequently permanent, and the economic reality of using those funds to purchase capital goods, which depreciate significantly in value virtually immediately.
The ultimate salvation of the U.S. cannabis industry may well come in the form of non-bank specialty finance firms. Specialty finance firms typically provide financing structures to businesses unable to tap the broader capital markets. Such firms are beginning to offer cannabis businesses an array of mechanisms to access extract equipment and technology without dilution or onerous credit terms.
The beauty of specialty financing transactions — especially leasing and royalty structures — is that upfront costs for customers are minimized. For these businesses, where free cash flow and burn rate are vital, spending less cash at the outset is a huge leg up. Done well, with technology in hand, the business can throw off cash in the near term, allowing it to easily meet monthly payments.
The best specialty financiers will effectively allow companies to move forward with scaling efforts by ensuring that supplementary and next-generation equipment/technology is accessible at reasonable cost when needed.
Cannabis businesses that turn to specialty finance can often, when desirable, turn variable costs into fixed costs. In many cases, firms can avail themselves of notable tax benefits and deductions.
In theory, the emergence of specialty finance firms with subject matter expertise in cannabis technology is transformative, democratizing the industry and providing a level playing field on which those companies with the best business models and products will have the opportunity to prosper. However, not all specialty financing arrangements are made equal.
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The Optimal Specialty Financing Partner
Best-in-class specialty equipment finance firms ought to add significant value to customers in a variety of ways. Key qualities to look for:
In-House Origination & Underwriting: Firms that originate and underwrite in-house are equipped to move faster and more adroitly in structuring a financing program. Without the need to seek approval from an outside committee, these firms are more likely to be able to offer creative, individualized hybrid structures.
Structure/Term Optionality: The needs of each customer are unique, and so it is important to look for a specialty financier that provides a range of programs, for example leasing, royalty or purchasing, as well as trade-in and refurbishment components.
Independent of Equipment Manufacturers: Ideally, the specialty finance shop won’t simultaneously be the producer of the equipment it’s financing. Businesses don’t want to be held captive to a particular line of machinery. Financiers who operate independently can offer customers the widest array of technology choices available.
Equipment/Process Agnostic: Customers are better off if they’re not forced to lock themselves into the use of one particular piece of technology or one particular extraction process. The best specialty financiers will be agnostic on these issues and will offer solutions well-tailored to the already in-place specifics of customers’ business models.
Technological Expertise Throughout the Life Cycle: Elite specialty finance providers serve as valued business partners, anticipating customers’ needs and standing ready to meet them. Cannabis extraction technology is specialized and it’s continually changing — different machinery may be needed for different processes and the innovation curve is steep. It is important to find a specialty financier with subject matter expertise, able to offer wise counsel across the lifecycle, from startup to maturity.
Affiliated Best-in-Class Advisory/Expert Services: Financing technology is game-changing, but the top specialty finance firms go further, offering comprehensive support systems including assistance with installation, maintenance, on-site training, off-site monitoring and diagnostics, automated processes and standard operating procedures.
Experienced and Proven Management: The stakes are too high for firms to place their trust in financiers lacking expertise in cannabis extraction and equipment finance. Firms with well-regarded management and a demonstrable track record are highly desirable.
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Specialty financing of cannabis extraction also makes for an outstanding investment opportunity, primed for rapid growth with outstanding margins and substantial operating leverage. The top firms have established rock solid recurring revenue models and the opportunity is global, with equipment being easily transportable across state and country lines. It is a model proven to elevate internal rates of return for both customers and investors, a true win-win.
There are no magic bullets, for businesses in the cannabis industry. But the emergence of specialty financing is a transformative development that will be critical in unlocking the cannabis extract industry’s exponential growth potential.