HEF Finance

How do I negotiate rate and term for cannabis loans?

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Disclaimer: the following blog is read at your own risk. It may be construed as rude, direct, and far too honest, but more importantly, it’s our opinion based on extensive experience actually closing cannabis loans.

Short answer, at your own peril. This is going to sound horrible:

If someone hands you a term sheet for a loan in the cannabis industry that is bankable, and the interest and cost of closing is higher than what you’d get in other industries, but not so high that you can’t be profitable by taking it, then sign the term sheet and send that funding source a fruit basket after closing. If you’ve uttered a few profanities at me after hearing the aforementioned comment, I understand, but please allow me to elaborate.

At HEF Finance, we tell it how it is rather than give you the ole “bait and switch”, which appears to be the predominant strategy for brokering loans in the cannabis industry. When it comes to capital that actually is deployed, rate and term is fairly predictable. Fantasy rates promoted by brokers also have predictable outcomes. You’re looking for cannabis capital. Cannabis capital is in high demand, and it’s a high-risk industry with a high loan default rate in an industry in which major banks won’t even accept new accounts. To make even more challenging, there are more requests from solid sponsors for debt financing in terms of quantity than there are funds large enough to serve all of those requests. When it comes to cannabis debt funds, it’s a seller’s market with a capital “S”.

So, throw out everything you know about traditional debt financing, and lose the idea that somehow a bunch of funds are going to compete for your business. I might care about your business loan as your correspondent lender, but the funds that actually write checks care far less. They have deal after deal after deal to review, and because HEF Finance generates a good volume of cannabis files, and submits only clean, well vetted files, I can just thank the stars they answer the phone when we call them. The only reason they’ll take my call is because we have built trust and a track record with them. They won’t answer the phone from brokers that bring them files that are not well scrutinized – typically the same brokers that take every file they get their hands on.

Which brings me to brokers. Most of them, god bless them, get into this industry from some parallel finance industry where getting any file to work on is a win. And, maybe in the typically lending world, they can “shotgun” a deal to a bunch of lenders and get some interest or maybe even a real term sheet. One of my favorite axioms might hold true in those instances: “even a trash can gets a steak once in while”. In the cannabis lending world, the shotgun approach taken by brokers who collect files and throw them into a Dropbox and send a shotgun email to lenders is 99% likely going to kill your deal and poison the lending well, permanently. And, this happens frequently, and we know it happens because the battered and beaten refugees from this process wind up at our doorstep, and not just once or twice, but regularly over a course of over a year in many cases.

It never ceases to amaze me – why can’t business people calculate the cost of delaying their funding for 6 months or a year and compare that to the cost they are trying to save in their deliberation over rate and term? In the cannabis industry, the calculation of opportunity cost should not only consider the revenue lost from each day, week, month, or year of lost business, but the market share lost in this fast growth industry. To belabor a cliché, “tripping over dollars to pick up pennies” comes to mind, but maybe there is a better analogy. How about this one:

Deliberating over rate and term and grinding lenders for a better cost of cannabis capital is akin to deliberating over the cost of picks and shovels in a gold rush, while you watch your competitors pay the premium for the tools and stake their claim.

All this to say, of course an honest finance house wants to acquire the best possible rate and term for their clients, and HEF Finance has the relationships as a correspondent lender to partner funds, and we’re in a position to make the best case for you, and help you tell your unique story. We want to maximize your loan amount and minimize your costs, but we also are focused on realistic terms that will execute the deal.

Unicorns loans are likely out there. Low rates, high LTV loans exist so we are told. We hear about these loans from borrowers, and we ask, plead, every time to reveal the source of these funds so we can maybe offer this cheap money to our borrowers. That said, private lenders are out there and a “one-off” loan can likely be found that beats the market rates. Although we hear about those loans from time to time, we’ve never heard a happy ending such as “the loan got done”, but I’m sure it happens on occasion.

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