Equity vs. Debt in Cannabis: What's Better?

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

The first move when starting many businesses is to decide between equity or debt financing. Read on for full-service business solutions provider Canna Business Resources (CBR) thoughts on the matter.

Equity vs. Debt: The Major Distinction

With debt finance, an individual or business is required to repay the money plus interest over a set period of time, typically in monthly installments. Equity finance, on the other hand, carries no repayment obligation, so more money can be channeled into growing the business.

Of course, investors do want to make a return on their investment, but they attain this result only if a company does well. Therefore, unlike debt finance, which has a predetermined cost, the cost of equity finance is more variable, as it’s a share in the future earnings and value of a company.

However, the cannabis industry can be a bit trickier to navigate.

Equity vs. Debt: In Cannabis

In the United States, it is currently 100% violative of federal law for “plant-touching” marijuana businesses to obtain a loan from a federally chartered bank or credit union.

Until the federal legalization of marijuana becomes a reality, or until the Safe Banking Act is passed, red tape will plague cannabis businesses that are applying for loans, setting up merchant banking accounts, and processing credit cards. A limit like that restricts these necessary elements of growing a business. 

Major management services organizations such as Curaleaf Holdings Inc. CURLF and Cresco Labs Inc. CRLBF have gone the debt finance route, taking on record-breaking loans upwards of $200 million. But debt financing may not be the best option for smaller businesses.

While loan options exist, with debt financing, a company may struggle to repay a loan while simultaneously establishing its business and accruing interest.

CBR offers advice on when to take on an equity partner vs. finance.

“Generally speaking, debt is cheaper than equity in almost every industry. What we can say is that pre-revenue operators are almost always better suited for equity partners, but debt capital markets have come so far that we can find a creative financing solution for almost every operator that walks through our door,” said the CBR team. 

Choosing equity over debt means that businesses essentially give up a percentage of ownership in exchange for the capital needed to start the business. 

Once the business becomes profitable, the investor will be entitled to profits for the life of a business. This downside to business owners in other industries can affect cannabis businesses less because the revenue growth potential in cannabis is so high, but the general outcome is the same. 

CBR’s Role in one of North America’s Fastest-Growing Markets

The global cannabis market reached $9.1 billion in 2020, 80% of that market being in North America. Overall, CBR predicts the cannabis market to grow 25% per year for the foreseeable future, driven primarily by deregulation, decriminalization, and new markets. 

“We at CBR have had great success providing financing alternatives to early-stage operators within the vertical supply chain, whether it be for construction, equipment, raw materials, A/R, growth, or acquisitions. Operators need flexible partners with the ability to pivot with the market, and that is exactly what we provide and what we do best,” said CEO Andrew Fellus.

When the CBR team was asked for thoughts regarding giving up equity vs. paying off loans, they said, “the economics for early-stage operators in high growth scenarios is pretty straightforward.”

“Let's say an operator is generating $3 million per year in revenue and has a new opportunity to double that size within the coming 12 months but needs $1 million in working capital to attain that goal.” 

“Now let's say an investor might value that company at 2x revenue = $6 million in value. To raise that $1 million, the operator would have to give up 14% of their company (1 divided by 7). Once they double in size, the company is worth $12 million, equating to 14% of $12 million = $1.68 million. They would have given up $1.68 million of real value just for that $1 million and will need another $2 million now to double again, and so on and so forth until they lose control of their company.” 

“Put simply, even if said operator were to borrow $1 million and pay 50% interest (repay $1.5 million), the long-term cost is cheaper, and they can keep 100% of their equity and control. And, most importantly, as a borrower in good standing with us, we can refinance or extend credit through our other product types, all of which are cheaper than equity solutions,” summed up the CBR team. 

CBR offers creative solutions that help avoid expensive equity options. The team assesses the risks and provides safe and affordable alternatives for each of its clients. CBR can fund up to $15 million in fully non-dilutive unsecured and secured options.

CBR is one of the only lenders in the cannabis industry to provide completely uncollateralized working capital financing to licensed operators and ancillary companies. The team works hard to understand the needs of every borrower and seeks to customize its offerings for each of its clients’ needs.

Visit https://cannabusinessresources.com/ to connect and for further information.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.