IF CANNABIS BUSINESSES can't get bank loans, aren't they totally screwed?
NOT NECESSARILY. I actually don't see pot businesses getting screwed in this particular manner. Even for non-pot startups, small business loans are generally out of reach nowadays. Most entrepreneurs start their ventures with savings, credit cards, and maybe a loan from a friend or family member. And most pot business owners—especially growers—coming from gray and black markets tend to have cash.
But let's say you don't have cash and are thinking about a (hard money) loan. A few years back, Mark Cuban said in an interview on Bloomberg, "If you are starting a business and you take out a loan, you're a moron." That's intense, but the rationale is that fixed payments can cripple a young business that needs to reinvest every dollar earned. And with all the uncertainty involved in starting a business—especially a pot business—a savvy owner should avoid shackling herself to a lender, signing personal guarantees, and so on. Really, the only good thing about debt is that all the business upside stays with the founders.
I talk to cannabis clients almost daily about where to find money, and to investor clients about where to park it. Oregon just got rid of its residency requirements, and that means more out-of-state and even international investors are looking to place their bets here. Because the regulated marijuana program is just now coming online in Oregon, most of these situations involve startups.
As a general proposition, startups tend to offer investors one of three things: debt (investor makes a loan), equity (investor buys an ownership stake in the business), or convertible debt (combination). Of these, convertible debt may be best. Lest your eyes glaze over, know that convertible debt is just a loan designed to become a piece of company ownership, at a discount, usually when the company receives future financing. It gets pretty technical from there.
A typical brand-new pot business/pot idea may offer 25 percent to 40 percent of its corporation shares or limited liability company (LLC) units in exchange for a sizable investment. If you have ever seen an episode of Shark Tank, you will know that a 5 percent stake won't get much interest from someone buying shares or investing in an LLC. The most heavily negotiated point is pegging the value of "X" percent of a brand-new pot business. That is incredibly subjective and depends on many factors, although I believe valuation of an Oregon pot business should be discounted to reflect the fact that the state will not cap licenses.
But you asked about loans. Some pretty solid general advice is don't take money if you don't need it. If you can bootstrap your pot venture by using your own funds and controlling early costs, you will thank yourself later. And if you do raise money from outsiders, be sure to protect yourself and comply with the legal formalities, which may include securities laws. Investors have a lot of options right now.