Types of Business Funding for the Cannabis Industry

With medical cannabis legal in nearly two dozen states and cannabis deemed legal for recreational consumption in four states, there’s growing interest in cannabis business funding. For the best chances of success cannabis entrepreneurs need to look beyond venture capital to alternative, or merely supplementary, funding sources. Established online companies like SmokeCartel can also benefit from expansion funding.

Types of Cannabis Business Funding

Venture capitalists see this as the ideal time to fund cannabis entrepreneurs, yet cannabis entrepreneurs themselves often need to learn more about alternate forms of funding. Cannabis entrepreneurs are in many ways the perfect match for venture capitalists since demand is robust and cannabis entrepreneurs often can’t gain a foothold in traditional equity markets – largely due to the ways in which cannabis is regulated federally. Entrepreneurs need fresh ideas for lucrative, yet legal, ways in which they can fund their ambitions and capitalize on the growing public demand for legal cannabis.

Alternative funding avenues like peer-to-peer lending and crowdfunding can help cannabis entrepreneurs complement venture capital funding and overcome the limitations of being unable to engage with larger financial institutions.

Peer-to-peer Lending

Peer-to-peer lending is almost tailor-made as an alternative form of cannabis business funding due to its inherent mechanics. To that point, peer-to-peer lending (a.k.a., P2PL) involves loans between two independent parties, or peers, and sidesteps conventional financial intermediaries like banks, who are reluctant to lend to cannabis entrepreneurs anyway.

Seed Accelerators

seed accelerator is a cohort-based, private funding program that puts the cannabis entrepreneur in touch with a financial backer-cum-business mentor. The accelerator, as the mentor is sometimes called, takes a partial ownership stake in the cannabis business.

Accelerators typically provide short-term financial and professional assistance, although the contacts and other investors that can result from the relationship frequently prove invaluable to cannabis entrepreneurs moving forward.

Crowdfunding Cannabis Startups

Crowdfunding is a type of collaborative funding that taps into the internet’s ability to bring together thousands of potential investors towards cannabis startups. Due to legal issues surrounding the cannabis industry, cannabis entrepreneurs often find the best funding potential in debt crowdfunding in lieu of, say, equity crowdfunding.

Debt crowdfunding involves a fixed repayment term, much like peer-to-peer lending, yet by going the crowdfunding route entrepreneurs are virtually assured of more exposure and potential sources of funding.

Legal Issues and Funding

Individual states have their own laws when it comes to caps on peer-to-peer loans, the terms under which cannabis entrepreneurs can secure debt crowdfunding, or even if cannabis debt-based crowdfunding is permitted state-wide. Maryland, for instance, has an annual investment cap of $100,000 yet doesn’t allow legal cannabis businesses, although cannabis was recently decriminalized in the state. Entrepreneurs should also note that large players in the debt crowdfunding world won’t allow cannabis startups to register site-wide (e.g., Lending Club).

Even given the fact that individual states have different funding limits and some debt crowdfunding sources are off-limits to cannabis entrepreneurs, there’s tremendous interest from investors eager to get into the multi-billion-dollar cannabis industry.