The Agriculture Improvement Act of 2018, also known as the “2018 Farm Bill,” paved the way for CBD business owners to expand legally across the United States thanks to the legalization of hemp cultivation and the declassification of hemp as a Schedule I controlled substance. Despite the relatively new legal status of CBD products, CBD business owners may find that they still experience difficulty in identifying and receiving financing from traditional lenders. Fortunately, alternative lenders have stepped in to bridge the gap to CBD loans, and business owners today have numerous options.
The Legal Status of CBD Products
CBD products, which are derived from hemp, are now legal at the federal level, but they occupy a bit of a legal “grey area” due to the many different state and local regulations that still affect business owners. Today, although the cultivation of hemp is now legal, the federal government still regulates the sale of CBD products and prohibits the addition of CBD to food and drinks. Traditional financial institutions like banks and credit unions may be willing to work with CBD business owners, but many are unwilling to get involved in a business that they still view as “risky” due to the many legal regulations.
Finding a Lender
While it may be possible to work with a traditional financial institution in your state, you might be surprised to discover that a dedicated CBD lender is also an option. Alternative commercial lenders have stepped up to fill in the gap left by traditional financial institutions who do not want to take the risk of working with CBD and cannabis businesses, and these lenders are uniquely qualified to understand the financing needs of CBD business owners. It’s common for CBD businesses to struggle with long cashflow collection cycles, irregular collections on invoices, a lack of viable lenders and dilutive equity capital raises, which means that they need the flexibility to be able to borrow money quickly and efficiently. Traditional lenders may not offer loan products that suit the needs of a CBD business owner, but dedicated CBD lenders have experience working with the unique needs of these businesses and are prepared to help.
Types of CBD Loans
There are two main types of CBD loans: debt financing and equity financing. Most people are familiar with debt financing is the type of financing, which might involve taking out a loan or using a business credit card, thereby accumulating debt and paying it back over time plus interest. Most people use debt financing in their personal lives. Unlike debt financing, equity financing is a type of lending that requires the business owner to offer shares of the company in exchange for financing. The investor or lender is paid back in the form of dividends or profit when the company is sold. Most CBD loans come in the form of private loans, real estate loans, equipment leasing loans, and dispensary cash advances. Different loan types may be more appropriate than others depending on your specific reason for needing financing, such as purchasing or renting real estate or funding inventory gaps.
Applying for a Loan
Once you have selected a lender for your CBD loan, you will need to start the application process. No matter which type of loan you choose, you will need to prove your creditworthiness, which is likely to require proof of your personal credit report, three to six months’ worth of bank statements, balance sheets, income statements, and your capital needs. Ideally, you will have a credit report that reflects a credit score of at least 700, have a strong history of making payments on time, and not have any bankruptcies on your record, and lenders may also want to review a list of your key management personnel and a list of all active licenses held. Having all your documentation together before applying for your loan will help move the process along as efficiently as possible.
CBD business owners today have more options for CBD loans than in previous years, but you’re still likely to get the most value working with a dedicated CBD and/or cannabis business lender who understands your unique market. Regardless of what your business’s needs are, there’s a loan product and lender out there that are right for you.