Potential cannabis entrepreneurs attending this month’s Hampton Cannabis Expo will seek guidance from a host of business professionals to navigate the fast-growing but challenging new industry.
Several exhibitors at the event, scheduled for August 19-21 at The Clubhouse in East Hampton, will be able to offer help on how to secure financing, one of the most difficult hurdles cannabis businesses face.
Most banks and other traditional funding sources will not lend money to cannabis companies for a number of reasons, not the least of which is that cannabis is still federally illegal. So businesses in this sector typically have to rely on private equity and hard money lenders if they need capital for equipment or day-to-day operations.
The Hauppauge-based National Business Capital, which will exhibit at the Hampton show, has provided funding to cannabis businesses across the country for the past several years.
“There’s no real bank financing out there, so there’s a lot of private lending going on 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 financial facilities.”
And while many cannabis businesses can borrow from companies like NBC, it’s much more expensive compared to loans for non-cannabis businesses.
For most companies seeking equipment financing, interest rates range from 5 percent to 8 percent, according to Camberato. However, rates for cannabis businesses can be up to three times the usual equipment financing rates, ranging from 12 percent to 18 percent.
The same is true when it comes to working capital borrowing rates, where non-cannabis businesses can get bank financing for around 6 percent these days, and private working capital lending rates for cannabis businesses range from 15 to percent 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 giving up equity,” he said.
Neil Kaufman / Courtesy of Kaufman McGowan
Another exhibitor at the Hampton show, Hauppauge-based law firm Kaufman McGowan, has worked on several secured lending deals for cannabis companies. Attorney Neil Kaufman, the firm’s founder and managing partner, says there are challenges for banks and other debt lenders in making loans to cannabis companies.
“Inventory collateral is not 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 even illegal for you to possess it. This is a huge obstacle for banks lending to cannabis companies because banks like to be fully collateralized.”
However, Kaufman said there are many hedge fund-type lenders to cannabis companies that have sprung up, mostly coming from the tough world of debt lending, where the cost of debt is significantly higher.
“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 when they have positive EBITDA, because that’s not nearly an accurate measure of cash flow for cannabis companies. it’s for non-cannabis companies,” he said. “These companies are inherently weaker financially, because of the tax burden on them, and they have weaker collateral packages. As a result, when you factor all of these things in, from the perspective of a lender you have to charge a higher interest rate in order to justify the higher risk. That’s why I think we’ve seen a lot of distressed lenders get more involved in this because they’re used to taking risks. “
NBC has provided loans to cannabis companies for $50,000 to $2 million.
“We’ve probably seen cannabis loan applications grow 10 to 20 percent year over year,” Camberato said. “More and more companies are catching up.”
While Camberato’s firm typically focuses on clients already making $500,000 to $30 million in annual revenue, budding cannabis entrepreneurs seeking seed money would not qualify. However, the hundreds of cannabis startups poised to open in New York in the next year or so may be able to find funding from the state.
“The state has created a $200 million debt fund that they’re planning to make available to these new licensees,” Kaufman said. “They are planning to lend them money at 8 percent interest without recourse. It is very reasonable and without personal liability to the business owners. That will be a wonderful thing.”
