How To Get 'Funding Ready'

As you prepare to open your cannabis business, it’s important to optimize your chances of getting the funding you need by making sure your personal financial situation is in good shape and looks solid to lenders. The first step is to understand your situation—get to know the financing options that exist and which ones you are eligible for. It's important to note that there are several types of funding available for startups, such as:

• Equity: selling an ownership percentage in exchange for capital
• Venture Capital & Equity investors: typically looking at high-growth companies with power management teams.
• Debt (loans): an advance of money that is paid back based upon agreed terms
• Traditional Commercial Bank loans (SBA etc):  very few of these options currently exist for cannabis entrepreneurs.
• Friends and family: make sure you establish a formal note and repayment agreement in exchange for the capital.
• Home equity line of credit: borrowing against the equity you have in your primary residence.
• Alternate financing: personal term loans/credit cards (business/personal) – the advantage is these are unsecured products and help get through cash flow shortages when launching a venture without giving up ownership or control of your venture.

Good Credit Is Important 

Loan qualification for any of the options outside of friends and family, or equity deals, is based on your credit score and your debt-to-income ratio (Your total monthly expenses, such as mortgage or rent/auto payments/min credit card payments vs. your total monthly gross income.)

When it comes to credit for the cannabis industry, understanding these numbers is key to sourcing and qualifying for the correct financing product, as this is the number lenders use to measure your ability to manage the monthly payments to repay the money you plan to borrow.

Focus on strengthening and maximizing your credit score with all three bureaus (Experian, Transunion, and Equifax). The higher the score, the more available financing options and for lower costs.

Almost all lending instruments for early life cycle/growth businesses will require a personal guarantee from the principal owners (anyone holding 20% or greater).

You can request and check your credit report. This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers. 

Credit Karma is a good resource for this as you can see your scores on the major bureaus but it is a soft pull, so won’t show as an inquiry, which can knock your score down a few points. 

You can also do that for free once a year through the official AnnualCreditReport.com website. Then review each report to see what’s helping or hurting your score.

What Affects My Credit Score?

Factors that contribute to a higher credit score, and are major credit score detractors include:

• a history of on-time payments
• low balances on your credit cards 
• a mix of different credit card and loan accounts
• older credit accounts
• minimal inquiries for new credit
• late or missed payments
• high credit card balances
• collections
• judgments 

In order to build your credit score, it's important to pay your bills on time! No strategies to maximize your credit score will be effective if you pay your bills late. If you have missed a payment by 30 days or more, a creditor will then report that data to the credit bureaus. In the event this occurs, you can contact the creditor immediately and ask for a courtesy removal.

How Can I Improve My Credit Score?

In order to avoid this occurrence, strategically pay off existing debt and keep the balances low on credit cards or other forms of revolving credit. If you can make periodic payments throughout the month it will help keep your credit card balances lower, and by extension, the overall utilization of your credit file.

Your credit utilization, or the balance of your debt to available credit, contributes 30% to a FICO Score's calculation. It can be easier to clean up than payment history, but it requires financial discipline as well as an understanding of the tips below:

• Keep balances low on credit cards and other revolving credit: high outstanding debt can negatively affect a credit score.
• Pay off debt rather than moving it around: the most effective way to improve your credit scores in this area is by paying down your revolving (credit card) debt. In fact, owing the same amount but having fewer open accounts may lower your scores. Come up with a payment plan that puts most of your payment budget towards the highest interest cards first, while maintaining minimum payments on your other accounts.
• Don't close unused credit cards as a short-term strategy to raise your scores: This can impact the age of your credit file and the overall utilization ratios negatively.
• Don't open several new credit cards that you don't need in order to increase your available credit: this approach could backfire and actually lower your credit scores.
• Raise your credit limits: many creditors will allow a customer to request a credit limit increase at any time. Before making this request, be sure to ask the creditor if they have the ability to do this only using a soft credit inquiry. When you increase your limit and your balances stay the same or lower, it immediately lowers your credit utilization.
• Have a blended credit file: having a mixture of installment debt (auto/mortgage) and revolving (credit cards/LOCs) comprises a % of your overall FICO score.

If you only have either credit cards or loans, consider getting the type of credit that you don’t have to improve your credit mix. Having both installment accounts and revolving credit, such as loans and credit cards, can boost your perceived credit-worthiness.

Dispute inaccuracies on your credit reports or consult a professional credit enhancement provider. A single mistake on your credit report can heavily impact your FICO score. If you identify negatives, you legally have the right to contest them with the three credit bureaus directly online or over the phone.

Be sure to focus on financials. Have your personal budget in order / ensure you have enough cash flow to support your personal & businesses expenses until your business is generating positive cash flow. 

We Can Help 

At CannaBusiness Financing, funding options are tailored to each situation. Companies with no business history can qualify for $200,000 plus per applicant and operating entities based on performance and profitability have many additional options.

Contact us today for more information and to see what you can qualify for!

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