Asset-based lending (ABL) for cannabis companies provides operational businesses in the cannabis industry with a financing option that leverages their existing assets. ABL works by using the company’s assets, such as real estate, inventory, accounts receivable and equipment, as collateral for a loan. This type of lending is tailored to meet the unique needs of established cannabis businesses, rather than startups. Read on to learn more about ABL to determine whether it’s the right financing option for your cannabis business.
How Does Asset-Based Lending Work?
Asset-based lending is a type of financing that allows businesses to secure a loan using their assets as collateral. Instead of relying solely on the borrower’s creditworthiness, ABL focuses on the value of the assets being pledged. This type of lending is particularly useful for businesses that may not have strong credit histories or are in industries that have unique challenges in obtaining traditional financing, such as cannabis companies.
Types of Assets That Can Be Used in ABL
Here are the main assets that can be used in asset-based lending.
In the context of cannabis companies, real estate asset-based lending involves using the value of owned or leased properties as collateral. The properties may include cultivation facilities, processing centers, dispensaries or any other real estate assets owned by the cannabis business. Lenders will assess the value of the properties and provide a loan based on a percentage of that value. If the borrower defaults on the loan, the lender can take ownership of the property.
Inventory financing allows cannabis companies to use their inventory as collateral to secure a loan. The lender evaluates the value and quality of the inventory, such as cannabis products, and offers a loan based on a percentage of that value. As the inventory fluctuates, the loan amount can be adjusted accordingly. If the borrower fails to repay the loan, the lender can seize and liquidate the inventory to recover the outstanding amount.
Accounts receivable asset-based lending involves using the outstanding invoices owed to the cannabis company as collateral. The lender assesses the quality of the receivables, the creditworthiness of the customers and offers a loan based on a percentage of the accounts receivable value. As the cannabis company collects payments from its customers, the loan balance decreases. If the borrower defaults, the lender can collect the outstanding invoices directly from the customers.
Equipment financing allows cannabis companies to use their machinery, equipment or other fixed assets as collateral for a loan. Lenders evaluate the value and condition of the equipment and provide a loan based on a percentage of that value. If the borrower defaults, the lender can seize and sell the equipment to recover the outstanding loan amount.
In all these cases, the lender assesses the value and risk associated with the assets being used as collateral. The loan amount is typically a percentage of the asset’s appraised value, and interest rates and terms may vary depending on the borrower’s creditworthiness and the specific lender’s policies. It’s important for cannabis companies to carefully evaluate the terms and conditions of asset-based lending to ensure they can meet repayment obligations and understand the potential consequences of defaulting on the loan.
ERC Bridge Loans
ERC Bridge Loans provide existing cannabis companies with quick capital to fund short-term projects, such as inventory expansion, until they secure permanent financing or alternative funding options. The Employee Retention Credit (ERC) is a refundable tax credit that covers up to 50% of qualified wages, up to $26,000 per employee, paid between March 12, 2020, and January 1, 2021, during the pandemic. While the program ended in 2021, businesses typically have until 2024 or 2025 to claim the credit by filing an amended return.
ERC Bridge Financing operates as a grant rather than a loan, helping businesses recover costs related to employee salaries, benefits, health insurance premiums, and retirement plan contributions. However, the grant is received after filing a tax return and obtaining a refund. The ERC bridge loan serves as an advance of the credit and is generally repaid when the employer claims their employee retention credits.
The Benefits of Asset-Based Lending
ABL offers several benefits for cannabis companies, including:
Increased Cash Flow
This lending option allows cannabis companies to unlock the value of their assets and convert them into immediate cash. By using their assets as collateral, businesses can access a higher loan amount compared to traditional lending methods. This infusion of cash can be used to fund operations, expand the business, invest in new equipment or seize growth opportunities. Increased cash flow provides the necessary liquidity for cannabis companies to thrive in a competitive market.
More Flexible Terms
The terms of the loan can be tailored to the specific needs of the cannabis company, considering factors such as industry fluctuations and seasonal variations. Lenders may provide flexible repayment schedules, adjustable loan amounts and the ability to borrow against different types of assets. This flexibility enables cannabis companies to align their financing with their unique business requirements, providing greater financial stability and adaptability.
The collateralization of assets reduces the lender’s risk, allowing it to offer loans to businesses that may not qualify for unsecured loans. For cannabis companies, which often face challenges in obtaining traditional financing because of regulatory restrictions, asset-based lending through specialized lenders offers a viable funding option. Having secured funding can enhance the credibility and trustworthiness of the cannabis company in the eyes of other potential investors or business partners.
Lower Interest Rates
Asset-based lending may offer lower interest rates compared to alternative forms of financing, such as unsecured loans or credit cards. Because the loan is backed by tangible assets, lenders perceive less risk, resulting in more favorable interest rates for borrowers. Lower interest rates contribute to reduced borrowing costs, which can positively impact the profitability and financial stability of cannabis companies. By minimizing interest expenses, businesses can allocate more resources to growth initiatives and improve their operations.
Grow and Expand With Asset-Based Lending
Asset-based lending provides a great funding option for expanding operations and scaling businesses. By leveraging assets as collateral, cannabis companies can access the necessary funds along with additional benefits. Specialized lenders with industry expertise can provide guidance throughout the process and answer any questions you may have along the way.
Frequently Asked Questions
Q: Do banks do asset-based loans?
A: Traditional banks are hesitant to provide asset-based loans to cannabis companies because of regulatory restrictions and industry complexities. Specialized lenders catering to the cannabis industry offer asset-based lending options.
Q: Is it difficult to obtain financing with asset-based lending?
A: While cannabis companies may face challenges in obtaining traditional financing, asset-based lending can provide a viable funding option. Specialized lenders familiar with the industry’s unique requirements can facilitate the financing process for cannabis businesses.
Q: What are examples of asset-based lending?
A: Examples of asset-based lending include using real estate, inventory, accounts receivable or equipment as collateral to secure a loan. These assets’ value determines the loan amount, providing businesses with the necessary funds to grow and expand.