July 1, 2017 marked the beginning of legal marijuana sales in Nevada. In Las Vegas, Nevada cannabis startup entrepreneurs watched as hundreds lined up outside their doors waiting for doors to open.
The cannabis industry is booming in states like Nevada that have now legalized the use of medical or recreational marijuana. However, many start-up businesses looking to venture into this pioneer industry face huge financial challenges because of the difficulty in raising credit to fund their start-ups.
For one, banks are more skeptical than ever about lending to startups. They were already nervous about lending to startups and small businesses before 2008, and then the financial recession happened.
Today, they hardly lend to any start-ups for the fear of defaulted loans.
Secondly, marijuana startup businesses are having it rough because banks don’t want any association with them. Why?
Simply because marijuana is still not legalized at the federal level. According to an advisory memo by the American Bankers Association, all banks are subject to the federal law; whether they are a national bank or a state-charted bank.
Nevada cannabis startups are no exception.
All banks within the United States maintain a federal deposit insurance which requires adherence to the federal law, and any violation of federal law by a bank could subject it to the loss of its charter. Therefore, the American Bankers Association heavily stresses that unless the federal law is changed, working with marijuana businesses will continue to be a dubious prospect.
So, does it mean that the dreams of many Nevada cannabis startups are shattered? NO.
Smart Nevada cannabis startups are finding ways to overcome bank rejections by getting alternative funding sources.
Several popular ways to fund a cannabis business startup in Nevada:
1. Credit Cards
If you didn’t know, credit cards are a major source of financing for small businesses and startups, with statistics even indicating that indeed more than 65% of small businesses use them on a regular basis.
With credit card loans for business, it’s all about having a good plan and strategy to exploit the flexibility of your credit cards towards investing and building your business/start-up for the long-term.
Most entrepreneurs using credit card loans for start-ups get funding through both personal and business credit cards, and do this for the first 1 to 3 years of the business before moving to more traditional loans. However, many entrepreneurs actually prefer not to move away from credit cards.
With the ability to raise as much as $150,000 in credit card loans per borrower, this is surely one great tactic to help you forge the way for your cannabis startup in Nevada amidst all the financial impediments from traditional banks.
Today, crowdfunding is becoming an increasingly popular way for startup businesses to find funding for their set-up and operations. Crowdfunding works by bringing together multiple small investments from numerous investors as opposed to the traditional way of getting funding from a single source.
However, it’s good to note that there are two types of crowdfunding: regular crowdfunding and equity crowdfunding. With regular crowdfunding, websites like Kickstarter provide a platform where backers/investors contribute to a start-up with the promise of getting some form of reward, such as a free service or product once the business reaches a certain milestone.
On the other hand, equity crowdfunding gives backers/investors a piece of the company. With this type of funding, the contributors turn into shareholders of the company. Both plans are 100% legal, but equity crowdfunding is highly regulated by the Securities Exchange Commission (SEC).
Can you use crowdfunding for your cannabis startup in Nevada? Yes.
In May of 2016, the SEC passed new regulations on how crowdfunding for cannabis works, opening doors for more investors to come on board. Prior to 2016, only wealthy individual would have been able to invest in cannabis. With the new regulations, investors can invest $2,000 per year as long as they get stock in the company. Wealthy individuals can invest up to $100,000, but on a cumulative basis rather than per company.
The regulations also allow small cannabis businesses to get up to $1,000,000 each year through crowdfunding. An example of a crowdfunding company for cannabis startups is Fundanna.
3. Venture Capital Firms
Venture capital firms are companies that invest mostly in start-ups with high growth potential and claim a certain percentage of equity in return.
By investing in the early life of a start-up, when success is unknown, venture capital firms pay less for the equity they purchase in the business. But as the company grows and becomes more valuable, investors may decide to sell to a larger company for higher price or sell shares in the public stock market.
Venture capital firms are a considerable source of funding for your cannabis startup.
4. Angel Investors
Angel investors are another great source of funding for startups, particularly cannabis startups.
An angel investor is a person who finances your startup using their own funds, either by injecting a one-time investment to help propel your business or by injecting money continously to propel the business through its tough early days.
Often, angel investors are persons known to you or individuals who have taken a liking to your product/service and would like to invest in exchange for ownership equity or convertible debt. Therefore, if you get an angel investor with a liking to your cannabis business plan, your funding worries may be taken care of.
Some angel investors are great contributors in crowdfunding platforms online, and they also build angel investor networks to pool together more capital for investment.
5. Peer-to-Peer Lending Networks
Peer-to-peer lending networks can provide you with the necessary funding to boost your startup’s growth. These networks allow lending transactions to take place directly between lenders and borrowers without the need for traditional lending institutions.
Online companies such as Prosper.com and LendingClub.com are some of the platforms where borrowers can request for specific loan amounts and then later pay the loans with interest over a certain set period of time. And just like when seeking funding with credit cards, many of these lenders offer unsecured loans (loans only based on your credit score).
6. Alternative Financing Companies
You may also consider getting financing from different companies that specialize in particular areas that are helpful for the growth of your startup. These include;
• Real estate mortgages– A real estate mortgage will help you purchase or refinance the property you need to operate your business from. Whether you want to set up a cannabis retail store, manufacturing facility, or even testing facility, this option is a good one.
• Equipment leases– You can also leverage your company equipment into a lease or finance option.
• Special investment funds– One such popular investment fund is the Kazan’s AP Investment fund (AP stands for Anti-prohibition), which seeks to help cannabis investors by giving them loans with the option of convertible debt (converting a loan into an equity stake).
Last year Kazan raised $12.6 million from investors that sought to buy property and rent it out to cannabis growers, retailers and distributors; and also to make loans to cannabis businesses.
If you are looking to get into the lucrative, though uncertain, industry of cannabis entrepreneurship in Nevada, you will not find traditional business funding options through your bank.
In spite of traditional lending falling short, many more platforms for raising funding to support cannabis businesses are now available. For best results, talk to a funding professional who can help you weigh your options.