Navigating the financial side of the cannabis industry can be overwhelming, especially when choosing the right type of loan. As a cannabis entrepreneur, understanding the difference between cannabis real estate financing and cannabis business loans is crucial to determining what type of financing suits your operation. While both loan types support cannabis ventures, they serve different purposes, come with distinct requirements, and offer unique advantages depending on your goals.
Cannabis Lending Landscape
The cannabis industry continues to face banking restrictions due to its federal status. Traditional financing options are still largely off the table, pushing cannabis businesses to explore alternative lending sources such as private lenders, real estate investment trusts (REITs), and specialized cannabis financial institutions. These lenders typically provide two major loan categories: cannabis real estate loans and cannabis business financing. Each serves a vital function but caters to different phases and needs of a cannabis operation.
What Are Cannabis Real Estate Loans?
Cannabis real estate loans are specifically designed for acquiring, developing, or refinancing property used in the cannabis sector. These loans are primarily asset-based, meaning the property itself acts as collateral. Borrowers often seek this type of financing to purchase land for cultivation, build greenhouses, or renovate existing properties for dispensaries or processing facilities. In most cases, the property must be cannabis-zoned, and the loan-to-value (LTV) ratio plays a crucial role in approval.
These loans are attractive to borrowers who want to invest in long-term infrastructure and retain ownership of valuable real estate. Lenders typically assess the property’s value, its intended use, market comparables, and any existing or projected rental income. While the application process can be complex, it often results in lower interest rates due to the security offered by the physical asset.
What Are Cannabis Business Loans?
Cannabis business loans, on the other hand, are structured to support the operational needs of a cannabis company. These are working capital loans that may fund inventory purchases, equipment leasing, payroll, marketing campaigns, or business expansion. Unlike real estate loans, these are usually unsecured or backed by business assets rather than property.
Approval for cannabis business funds typically hinges on cash flow, profitability, and the borrower’s creditworthiness. Lenders may also examine business plans, financial statements, and the company’s leadership team. These loans are ideal for businesses that need short-to-medium-term funding to meet growth goals or cover temporary cash gaps.
Key Differences in Loan Structure
One of the most defining differences lies in loan structure. Cannabis real estate funding is long-term, usually spanning 10 to 30 years. They come with fixed or variable interest rates and are repaid over extended periods, making them ideal for major capital expenditures. In contrast, cannabis business loans tend to have shorter terms ranging from six months to five years, depending on the lender and business model.
Loan amounts also differ significantly. Real estate loans can range from hundreds of thousands to millions of dollars due to the high value of property investments. Business loans are generally smaller but more flexible in terms of usage. This distinction makes it essential to align the type of loan with your business strategy and financial projections.
Application and Approval Criteria
When applying for cannabis real estate funds, the primary focus is on the property’s value and potential. Lenders assess location, zoning compliance, environmental concerns, and development potential. Applicants should be prepared with appraisals, zoning documentation, and detailed project outlines. A higher down payment is usually required, often around 20-40% of the property’s value.
In contrast, cannabis business loans place a heavier emphasis on the company’s financial health. Lenders evaluate bank statements, income projections, expense reports, and possibly the credit scores of owners or partners. Startups may face more scrutiny unless they can offer a strong growth narrative or present evidence of pre-existing contracts and demand.
Use Case Scenarios
To make an informed choice, it helps to understand which type of loan fits specific scenarios. If your goal is to expand your retail space, construct a new cultivation facility, or refinance an existing cannabis-zoned property, then cannabis real estate loans are the right fit. They enable asset accumulation and provide a stable foundation for long-term growth.
On the other hand, if you’re launching a new product line, restocking inventory before a busy season, or hiring staff for an expansion project, cannabis business loans are more appropriate. They offer agility and are better suited for addressing immediate operational needs.
Cost and Risk Considerations
Interest rates for cannabis real estate loans are generally lower because they are secured against tangible property. However, they often involve higher upfront costs such as appraisals, legal fees, and insurance. If a borrower defaults, the lender can seize the property to recoup losses, making this a lower-risk option for lenders.
In contrast, cannabis business loans carry higher interest rates due to the perceived risk and lack of collateral. They may also come with tighter repayment schedules and fewer grace periods. However, they require less capital upfront and can be approved more quickly, making them a viable option for businesses in need of immediate cash flow.
Choosing the Right Loan
Selecting the right financing option depends on your business stage, funding needs, and long-term goals. A well-established operator looking to build a flagship retail location should lean toward cannabis real estate loans. A startup or mid-stage business that needs flexible working capital would benefit more from cannabis business funds.
Additionally, some businesses may need both types of financing at different stages. For example, a vertically integrated company might use a real estate loan to build a cultivation center and a business loan to fund its retail launch. Understanding how these loans complement each other can enhance strategic financial planning.
The cannabis industry continues to grow rapidly, and access to the right kind of capital can be a game-changer. Alta Real Estate Fund is the ideal choice for cannabis real estate loans. They take the time to understand each client’s business and financial needs, crafting innovative, customized funding solutions that enhance efficiency and drive success.