Receivable Financing for Cannabis Businesses

When you run a company in a regulated sector like the cannabis industry, it can be difficult to get the financing you need. If you need funding but don’t have collateral, receivable financing may be an option to consider. This method of financing uses your accounts receivable to access the money your customers owe you now instead of waiting for them to pay. 

What is Receivable Financing?

When using accounts receivable financing, a business agrees to prepay some or all of its outstanding invoices in exchange for a fee from the funder. 

How Does Receivable Financing Work?

Receivable financing isn’t technically a business loan. You are not borrowing against your cannabis invoices. Instead, you are selling them to a third party. This financing enables you to obtain the cash flow your business needs without taking out a loan to cover expenses like payroll and equipment upkeep. 

5 Steps of Receivable Financing 

The exact process will vary based on the financing company, but these are the general steps.

1. Gather Your Information and Documents

Usually, lenders will do their due diligence to make sure you’re a good candidate for financing. It might verify:

• Customer profiles
• Aging report for your company's receivables
• Lien details 
• Business taxes
• Financial statements

2. Determine How Much Money You Need for Positive Cash Flow 

The standard recommendation for managing cash flow is to keep three to six months' worth of operating expenses in cash. 

3. Choose the Customer Accounts That Will be Funding the Financing 

You can pick and choose which accounts are used for the advance. Usually, the advance is a percentage of the face value of the receivable account. You still communicate with your clients directly, and you are in charge of obtaining payment for the invoices. 

4. Explore Financing Options 

Because there are different types of financing available for accounts receiving funding, you’ll want to familiarize yourself with each one to see which is best for your situation and cannabis business. 

5.  Look for a Lender

You’ll want to choose a lender that specializes in cannabis funding and knows the ins and outs of the business. Because of federal regulations, it can get complicated so working with an industry expert is recommended. CBR understands the need to move quickly and can provide cannabis equipment financing to help ensure timely delivery of key pieces of equipment. 

Types of Receivable Financing

Under the category of receivable financing, there are separate types of financing options that may be available to you. Some types you can explore with a cannabis lender include:

1. Invoice financing. The purchase order (PO) financing company may decide to buy the invoice — usually at a discount — if the customer is permitted to pay over time. Typically, the customer makes a direct payment to the PO financing firm.

Considerations With Receivables Financing

With any type of financing agreement there are some considerations, and this is no exception. Here are a few things to consider before using receivables financing with any lender or finance company:

• Make payments once accounts are paid. To avoid falling behind and incurring additional fees, you’ll want to make payments immediately as your customers pay you. 
• Lenders will typically verify that all invoice amounts are correct and that customers have received their products. The application requires having proper documentation on hand and ready to submit. 
• Accounts receivable financing can be an ongoing process. Only advance what is needed because interest rates are often much higher than other industry financings because of the risk involved. Fees associated with the advances can add up.
• Have a plan in place for repaying the advance if customers fail to pay on time. 

Control Your Revenue Stream

Accounts receivable financing helps you grow your business by ensuring you have the funding you need. It’s a great option for business owners with reliable and consistent customers, but there are some considerations. Canna Business Resources provides bespoke financing capabilities to acquire equipment, or financing equipment that has already been purchased, to provide operators equity. You’re responsible for collecting payments from your customers and ensuring you’re able to repay the advance. 

Frequently Asked Questions