How to find a loan for your cannabis business?

The underserved cannabis industry,

as it pertains to financial services, is a minefield to be navigated only by the intrepid and savvy. The dearth of lending options in the cannabis sector, and banking options, make it uniquely difficult to obtain debt financing. And there is no shortage of pitfalls and misleading brokers.

Many commercial loan brokers not experienced in the cannabis lending world sometimes use a prospective cannabis-related business (CRB) borrower as a guinea pig to see if they can source a legitimate debt facility. We understand what it’s like to be new to this game. We were new to the cannabis lending universe only a few years ago, and there’s no harm in it, but sometimes brokers unwittingly drag borrowers down rabbit holes. Rumors of banks offering lending options, and friends of friends who said they were able to obtain single digit interest rates on cannabis loans might entice well-intended brokers to buy into a false sense of confidence with the cannabis lending environment. In the cannabis industry, there are a good number of brokers misrepresenting themselves to be direct lenders or experienced cannabis finance brokers. In many cases, they require an upfront fee to engage their services and promptly disappear, or they present a bogus term sheet that appears to be from a bona fide lending source and charge tens of thousands of dollars for obtaining it.

Eventually, prospective CRB borrowers looking to source capital might, by some luck or a referral, wind up speaking with a firm who knows the landscape of cannabis lending. Real lenders with funds allocated to loans in the cannabis industry who execute and underwrite credit facilities are not always easy to find, and in many cases brokerages with less than desirable business practices are found instead.

To add to the confusion, legitimate specialty lending firms often require engagement fees when offering their services. A legitimate firm typically requires a $5000-$10,000 fee that is applied toward their overall points and fees for underwriting at closing. Essentially, it’s a deposit that requires the borrower to commit to that broker to lower their risk of the broker doing the underwriting for the borrower. It’s always possible that a borrower may decide to walk away from the terms after the brokerage has expended thousands of dollars in labor to obtain legitimate term sheets from bona fide funds. Legitimate firms hedge against this risk and ensure the seriousness of the borrower by charging an upfront fee. The problem is that some brokers that we refer to as “fee collectors”, rarely fulfill the promise of providing real term sheets from bona fide money sources. They tend to accept any engagement fee regardless of whether or not the borrower truly has the ingredients to close a loan. Often, their intent is to collect engagement fees, and rarely, if ever, close a loan.

So, how do you determine the brokers who are interested in the execution of your loan and not just the collection of fees? That’s not so easy, but here are a few tips:

• If your debt request is under $10M and the broker is asking for more than $15,000 for an engagement fee, that’s a red flag that indicates they are purely focused on racking up fees prior to getting commitments (term sheets) from real lending sources.
• If the debt request is for an equipment lease/purchase for extraction or cultivation or lab testing equipment, underwriting is simpler than labor intensive commercial real estate, M&A, or mezzanine financing. Legitimate firms might charge an engagement fee or not required any upfront fee at all (less that $3,000 for example might be reasonable if they were to charge a fee). The exception to this is if there are special extenuating circumstances such as trying to overcome a tax lien or bankruptcy or something similar. In that situation, it requires more work from your brokerage and larger engagement fees could be necessary.
• If the broker does not appear to be asking questions about the feasibility of the deal in terms of the valuation of assets, the background of the owners, and the disposition of the assets, then they are either inexperienced or they are only focused on collecting fees up front. Legitimate brokers spend most of their time telling borrowers why they should not pay them to engage their services. Fee collectors often just tell borrowers what they want to hear.
• If the broker is not able provide estimated ranges of rate and term, then they may not have been involved in underwriting your type of cannabis loan. This could indicate that this is an industry in which they are inexperienced.
• If you are still in doubt about a broker’s credibility and they do not provide references from prior borrowers upon request, then you may be correct in doubting their ability to help you.

So, in that case, why not just find a broker to work on pure contingency with no fees upfront? Seems like an easy solution, but here’s the problem:

If a broker is willing to accept your deal for free, and it’s not an equipment lease, then that is also a red flag. So how is it a risk to you if you’re not paying an upfront fee to a broker? The answer is that a legitimate firm that accepts engagement fees from borrowers has done so because they believe they can execute the loan, and they have been paid a fraction of the fee in advance to work on the file. Firms that charge fees will get far fewer engagements than brokers who are engaged with no fee upfront. By accepting fewer engagements, legitimate firms limit their focus on files that have a strong chance of closing. Legitimate firms perform more efficiently by not taking files from borrowers who are either not serious enough about executing their loan to put some “skin in the game”, or have little confidence that their own loan can close (often because of undisclosed issues). This allows legitimate firms who charge a portion of their fee upfront to lower their risk by focusing on your file to get it to the closing table.

The broker who takes your file with no fee up front is a what we refer to as a “file collector”. They might, on their timeline, shop your deal with a couple of lenders, or blast it out to 50 lenders (thereby likely destroying your chance of getting debt financing), but when they encounter any resistance or difficulty with a prospective funding source, they often simply move on. They may have a hundred or more dormant files on their desk, and all of the prospective borrowers are asking for progress updates on their loan that could be stalled because it was poorly packaged by the broker in the first place. And, if one of their newer files or older files start to get traction, your deal can stay on hold until such time they have time to try and do real work on your file. In the “file collector” world, they can’t afford to put too much time into your file if even a perceived snag occurs. That said, with a “file collector”, you might get lucky and the loan flies through with little work, but that’s extremely rare. We know this because we hear it from borrowers who engaged zero fee “file collectors” and watched their file age like fine wine while the broker pushed them off to handle other priorities. Those refugees, or at least the serious ones, often wind up at our firm eventually, or come back to us after they’ve incurred enough pain to realize that our engagement fees were far cheaper than the opportunity cost of not closing the loan in a timely fashion. So, if you want your cannabis real estate or construction loan to move as if it’s a priority and you want a chance to close your loan, pay a professional just like you would pay your accountant or gardener.