7 Tips for Getting a Cannabis Business Expansion Loan Approved

Growing a business takes vision and determination. It also takes financing.

If you’re in the cannabis industry, you already know how challenging it can be to find a cannabis-friendly lender. Thankfully, many non-traditional lenders provide business expansion loans that can augment your business. Here are some tips to ensure that you receive approval.

What is a Cannabis Business Expansion Loan?

Existing cannabis business owners can use a loan to expand business operations. A business expansion loan can be used to finance the growth of your business. For example, you might use a loan to cover expenses such as:

• Purchasing additional real estate
• Upgrading your retail space
• Investing in new products or equipment
• Payroll
• Research and development

These loans are typically lump-sum payments. Cannabis business owners repay the loan — plus interest — over a predetermined term.

How to Secure Your Cannabis Business Seed Money

How can you be more confident in your ability to secure cannabis financing? While lenders have different standards, business owners can use the following tips to improve their chances of securing funding.

1. Clean Up Your Business and Person Credit

Do you know your business credit score? If not, you can receive a free credit report from each of the three major business credit bureaus: Equifax, Experian and Dun & Bradstreet. The higher your business credit, the better your chances of securing a loan with favorable rates and terms.

Lenders will also look at your personal credit history when you apply for a business loan. It’s important to take steps to clean up your business and personal credit histories. Consider doing the following:

• Checking your credit report for errors
• Using electronic payment options to pay your bills on time
• Using less than 30% of your credit limit
• Taking on additional loans to increase your credit mix

Keep in mind that it takes time to build strong credit. That’s why it’s important to develop good habits and stick with them to improve your credit.

2. Make Sure Your Business Plan Is Rock-Solid

Before you apply for a loan, it’s a good idea to update your business plan. The U.S. Small Business Association recommends that your plan include the following:

• An executive summary
• A description of your products and services
• Market research or a marketing plan
• A description of your corporate leadership
• Financial projections
• Funding request

The more data you provide, the more likely it is that your lender will look favorably on your business and approve your requested amount.

3. Reduce Your Debt-to-Income Ratio

In addition to your credit history, lenders will also examine your debt-to-income ratio. This ratio measures your monthly income against your monthly expenses.

For example, if your cannabis business earns $5,000 each month and you spend $2,000, your debt-to-income ratio is 40% ($2,000/$5,000).

What’s the ideal debt-to-income ratio? It depends on your lender, but most lenders won’t lend to businesses whose debt-to-income ratio exceeds 50%. The most favorable rates and terms will go to those with a debt-to-income ratio of around 40%.

Before you apply, you might consider ways to lower your overhead costs, which will result in lower monthly debt. Cutting out non-essential services or re-negotiating certain contracts (such as utilities or internet) may be a good place to start.

4. Keep Your Daily Bank Balance High

Sometimes, lenders will be more concerned about your daily bank balance than your actual income. Why? Because this number indicates high liquidity and the ability to repay the loan.

Keep your daily bank balance high by spacing out your bills. That way, you won’t wipe out your bank balance by paying your debts simultaneously. You might also consider maintaining a cash reserve to keep your balance high.

5. Boost Business Revenue Prior to Applying

The higher your revenue, the greater your chances of being approved for a business expansion loan. Before applying, you may want to pull out all the stops to boost your revenue. To do so, you might consider strategies such as:

• Promotional offers to increase sales volume
• Marketing campaigns to increase brand awareness
• Creating new contracts with other cannabis business owners and suppliers
• Introducing new products or services

Even a month or two of solid growth can demonstrate to lenders that your business can generate strong revenue, which can improve your odds of receiving a loan.

6. Work with a Cannabis-Friendly Lender

Banks and other traditional lenders don’t offer cannabis loans. To fund your business, you’ll have to seek out cannabis-friendly lenders who can supply you with the financing you need to grow your business.

But just because these lenders are harder to come by doesn’t mean you shouldn’t shop around for the best rates and terms. The best option is to compare rates from at least three different lenders to ensure that you receive the best possible loan.

7. Understand Lender Requirements 

Remember: not all lenders are the same.

Not only will different lenders offer different interest rates and terms, but they may have specific requirements you must meet to secure loan approval.

Make sure you understand what these requirements are. For instance, you may want to avoid lenders who charge additional origination fees or other costs. Comparing these requirements can help you find a lender that aligns with your business.

Find the Loan that Fits Your Business

Though cannabis loans aren’t as easy to obtain as other business financing options, getting one doesn’t have to be a challenge. Cannabis business owners can use these tips to improve their chances of receiving a loan and secure favorable rates and terms.

Frequently Asked Questions