The Rise of Debt Financing in U.S. Cannabis Markets

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By Judson Hill

Thinking back to 2018, it’s crazy to see that equity investments in the U.S. cannabis industry exceeded actual cannabis sales that year. Nationwide cannabis sales in 2018 were just under $ 10 billion, while equity investment in the industry was around $ 12 billion. Anyone who has been involved in or followed the cannabis industry for a few years can remember ad after ad from various companies raising capital primarily on the basis of projections and a nice logo. Sadly, 2018 and 2019 saw the majority of those wasted investments due to a variety of issues ranging from regulatory hurdles to compliance, over-taxation, over-valuation, greedy management teams, and the list goes on. However, there was a silver lining here as the cream really started to rise to the top with high quality operators starting to emerge and something really wild started to happen – a few companies got profitable.

As someone who has worked in cannabis for five years, which seems like decades in a rapidly changing industry, I would be remiss if I did not highlight the many challenges these companies face. As a partner of a pre-roll brand in 2018, I saw with my own eyes the lack of access to traditional sources of capital that were available in my previous work in fashion or really in any other traditional industry. . Increased sales and growing demand have created a constant need for more capital to purchase raw materials. In California in particular, operators were mostly asking for NET 30 terms, which further extended the cash conversion cycle, and on top of that there was no credit rating for cannabis companies, so sales often turned into losses when you sold to the wrong person. The last thing a business would want to do is raise capital and dilute its own equity just to go out and buy a bunch of packaging when you’re not even sure you’re getting paid for the end product. Unfortunately, that was almost the only way to go. Due to the illegal status of cannabis at the federal level, there was no way to go to the local bank and get a small business loan or line of credit or even use factoring services that I knew in the world of clothing.

Fortunately times are changing and the past two years have seen a huge emergence in the availability and use of debt financing in cannabis. This is most clearly seen in the headlines as the large multi-state operators (MSOs) set up massive credit facilities on the basis of their strong financial performance and profitability. Companies no longer rely on projections and investor arguments, but on concrete figures and proven business models. In the past year alone, we’ve seen all the big names raise over $ 100 million in debt per company – Cresco, GTI, Ayr Wellness, Curaleaf, TerrAscend, and the list goes on. Unlike the Licensed Canadian Producers (LPs) a few years ago, these companies generate cash flow that makes debt much more palatable despite the fact that rates are still much higher than any traditional industry. The leaders of these publicly traded MSOs mostly have non-cannabis backgrounds and are very accustomed to leveraging credit as a tool for evolution rather than seeing it as a dirty word the way cannabis in the world. old had affiliate “debt” in the past.

What is really exciting to see is the runoff in terms of the availability of debt financing for private companies and small operators outside of MSOs. California is the largest cannabis market in the world and consists of a highly fragmented supply chain that leads to many B2B transactions. While this structure allows for more effective competition against limited license states, it can also be much heavier for working capital requirements, as no single company has full control over their entire supply chain. This has led companies to step in as a commercial lender and really solve the industry’s biggest problem: a lack of access to working capital at the micro level. A few years ago, it would have been unheard of for a lender to provide revolving lines of credit that allow these companies to buy cannabis in bulk – and weed is unfortunately not bought with a swipe of a card. credit due to a number of federal regulatory issues. It’s 2021 here, but a number of local credit unions in cannabis-friendly states across the country are turning to banking operators, and more lenders are entering the space every day. First, these businesses need and deserve help, and second, there is too much money to be made by investors and traditional financial institutions to sit on the sidelines. Lending to cannabis operators or more specifically lending to proven lenders in the cannabis industry is the best way to gain exposure for your portfolio with significantly lower volatility than equity investments.

What’s most exciting about being a lender in the cannabis industry is seeing the transformation over the past three years from debt seen as something for struggling businesses to new credit facilities. hailed in the headlines as a major mark of success. As the country moves towards federal legalization, I only see more and more capital entering the cannabis space, but this time around it will be placed much more cautiously than in 2018.

Judson Hill is Vice President of Business Development at Bespoke Financial Inc., which was founded in 2018 as the premier licensed commercial lender focused on the cannabis industry.

Más contenido sobre cannabis en Español en El Planteo.


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