Lending In The Legal Marijuana Industry

crowdfundingInvestors have been flocking to the marijuana industry in recent years, thanks to great progress in the legalization of cannabis and booming business activity. But wealthy angel investors are not the only ones betting in this nascent industry. Small funds and private lenders are backing cannabis companies, too.

Troy Dayton, CEO of the investor network The ArcView Group, has seen how lenders have become a primary source of finance for marijuana businesses.

ArcView helps connect marijuana investors and companies. Within just two years, the network has put in $50 million into 73 cannabis companies, and Dayton said about $7 million to $8 million of this are loans from private funds.

What’s more, Dayton predicts that financing through debt will increase because of several reasons. First, cannabis companies often prefer loans to other financing. Second, some states require investors to be in-state residents to be able to finance marijuana businesses – thus, funds are coming from private residents instead of big institutions.

But arguably the biggest reason lending is hot in the industry is that cannabis companies do not have access to traditional banks. The federal status of marijuana as a drug makes banks hesitant to service marijuana businesses, even though such businesses “often have very strong financials,” said Dayton. For him, this is a big opportunity for people to lend at higher interest rates.

There are, of course, challenges when lending to a legal marijuana business.

Glen Weinberg is the co-owner of Fairview Commercial Lending, a hard-money lender based in Colorado. The company has financed several marijuana business deals in the state that is considered as the epicenter of the US legal marijuana industry. According to Weinberg, evaluating such deals is difficult.

For one, funding proposals from marijuana companies often include building purchases that are double the price of what traditional businesses are charged. In Denver, cannabis retailers and producers have to pay rent that can be as high as three times the charge for other businesses. These high prices could create a price-bubble environment – a risk for lenders financing buildings.

Another challenge is sifting through the proposals. Weinberg said there are numerous startups that pitch dubious proposals, almost with the mentality that just because they can grow pot in their dorm rooms, they could be the next big thing. “It is not going to happen,” Weinberg said.

However, he did reveal that interest rates in marijuana commercial loans can go as high as 25 percent.

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