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Cannabis entrepreneurs attending this month’s Hamptons Cannabis Expo will seek guidance from a wide range of business experts on how to navigate the fast-growing but challenging new industry.
At the August 19-21 event at The Clubhouse in East Hampton, a handful of exhibitors will be able to offer help on how to secure financing, one of the toughest hurdles facing cannabis businesses.
Most banks and other traditional financial sources won’t lend money to cannabis companies for a number of reasons, not the least of which is that cannabis is still federally illegal. Therefore, businesses in the sector often need to rely on private equity and hard-money lenders to capitalize on equipment or day-to-day operations.
Hauppauge-based National Business Capital, which will be presenting at the Hampton Expo, has been funding cannabis businesses across the country for the past several years.
“There’s no real bank financing out there, so there’s a lot of personal lending in the space,” said Joe Camberato, founder and CEO of National Business Capital. “There are still limited lenders, but we’ve been able to help cannabis companies get capital and financial tools.”
And while many cannabis businesses can borrow money from companies like NBC, it’s more expensive than loans for non-cannabis businesses.
For most companies looking for equipment financing, the interest rate ranges from 5 percent to 8 percent, according to Camberato. However, the cost of cannabis businesses can range from 12% to 18% of financial instruments, which can be three times higher than the normal cost.
The same is true of borrowing rates for working capital, where non-cannabis businesses today can get bank financing at around 6 percent, and personal loans for cannabis businesses range from 15 percent to 18 percent for working capital.
But Camberato points out that alternative sources of capital may cost 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
Hauppauge-based law firm Kaufman McGowan, another exhibitor at the Hampton Expo, has worked on several secured loan deals for cannabis companies. Attorney Neil Kaufman, the company’s founder and managing partner, said there are challenges for banks and other lenders to lend to cannabis companies.
“The lien is not useful as collateral for lending purposes, because you have to have permission to sell that lien,” Coffman said. “So even if your debtor defaults and you foreclose, the collateral is worthless in your hands. It’s illegal for you to confiscate it. That’s a big hurdle for banks lending to cannabis companies, because banks want them to be fully collateralized.”
Still, Kaufman said, there are many hedge fund-type lenders that have grown cannabis companies, mainly from the distressed debt world, where the cost of debt is much higher.
Many cannabis companies don’t make a lot of money and don’t have much in the way of positive cash flow, even if they have a positive EBITA, because that’s not an accurate measure of cash flow for cannabis companies. It’s non-cannabis companies,” he said. “These companies are inherently financially weak, because of the tax burden on them, and they have poor collateral packages. As a result, when you put all these things in, you have to charge higher interest rates to ensure a higher risk from the lender’s perspective. I think that’s why a lot of lenders are used to taking risk, so they’re more into this issue.” We watched them enter.
NBC has provided loans ranging from $50,000 to $2 million to cannabis companies.
“We’ve seen cannabis loan inquiries grow 10 to 20 percent a year,” Camberato said. “More and more companies are reaching out.”
While Camberato’s company focuses on clients making between $500,000 and $30 million a year, budding cannabis entrepreneurs looking for seed money may not qualify. However, hundreds of cannabis startups could open in New York next year or receive funding from the state.
“The state has established a $200 million debt fund that they plan to provide to these new licensees,” Coffman said. “They plan to lend money at 8 percent interest free. It is very reasonable and has no personal liability for business owners. This will be a very good thing.
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