How to use Debt for Financing your Cannabis business: It can be difficult to raise equity for a startup. Each investor has their own timeline and the ups and downs can make it seem like you’re on the one-yard line or that you are facing a fourth and longer. We have all experienced the joy of meeting enthusiastic investors only to find out that they are not interested in the project. The classic “yes yes yes”, investor who claims they have the funds and intention to quickly take out large amounts of equity but is either misinformed or not aware of their intentions. Many investors choose to stay on the sidelines until their capital stack is complete. This is a common practice for many investors.
Although investors may still be able to realize huge returns in the cannabis sector, it is more difficult to raise capital today than in years gone. Investors are not jumping at the chance to be part of the “green rush” after the numerous failures in private equity cannabis investments. Instead of consuming the green Kool-Aid, investors are more likely to ask about the potential problems and not just the issuers.
It is crucial to build momentum in large capital stacks. Because they are dealing with the risks of investing in startups, they also have to consider the possibility of losing their capital. What happens if my money is not used or the capital raise takes longer than expected? This is how you get large investors at the edge and wait for other guys to jump. As part of the capital stack, debt might be able to provide the momentum needed to get the edge dweller motivated to jump as soon as possible.
Let’s suppose, for instance, that your startup capital raise is highly asset-intensive. There are potential real estate acquisitions, construction, and components, assuming that the operation is a grow operation or extraction lab. If the project’s principles are strong and the property value is accurate, a startup could obtain a term sheet from a lending source for 60% or more of its project cost. To do that, a firm that underwrites these credit facilities would need to be retained to acquire that financing option which means there will be a cost associated with doing it. The cost of not having momentum in the capital stack may be far greater than the cost to acquire a term sheet. It’s easy to do the math by comparing these numbers. It’s likely a no-brainer in 99 percent of cases.
Selling equity, especially if the startup expects high profitability, can be the most costly financing option. As a sponsor who believes in the success of their business, I would be willing to fight for every point of a business that generates millions of dollars per year with returns of 20-40%. Partner for life is more costly than taking on high-cost debt partners for just a few years. This assumes that partners have created a plan they believe will be successful. The principals of a model can save valuable points by using debt, even high-cost cannabis debt. A term sheet can be used to build momentum. It may help you finish or not finish a capital raise. This is How to use Debt for Financing your Cannabis business.
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