Top 5 Factors in Obtaining a Hemp Business Loan
In a word, hemp lenders are assessing one thing - risk.
The lower the risk you and your company present and can document personally and with your business, the greater the chance you have of receiving a loan. If you do not have all of these risk factors covered, it does not mean you cannot get approved for a loan.
Each lender is different and one who has a higher risk tolerance may be satisfied with one or two of the risk factors covered. Here are the top 5 risk factors
hemp business lenders assess in no particular order:
1. Real estate equity
– do you own the land and/or buildings for the property your business is or will be located on? If so, are you willing to provide the property as collateral (preferably 1st lien position) to secure your loan request? If you do not own and have equity for your hemp business, do you have other commercial properties you would be willing to pledge?
By showing that you have equity in real estate, your loan request is seen as less of a risk vs. leasing
for example because the lender has something to fall back on if you default on the loan.
Lenders in general like properties that are closer to metro areas which provides greater assurance that a property can be readily sold by a lender if they have to take it back.
– do you have enough income to support the loan payments? Since many hemp businesses are startups these days, they often are not showing income on their current business yet. These borrowers often assume that a lender will lend based on their projected income.
This is usually not so for debt financing. Lenders who will loan solely based on future income projections are not debt lenders; they are equity investors
who will take a portion of ownership equity in your business in order to provide you with capital. Debt lenders will certainly want to see that you have income projections (proforma financials) however they are more interested in your current income related to your ability to make the loan payments now.
If you are a startup
, most lenders will consider income from other businesses or jobs that you and your partners (if you have partners with ownership interest in your business) have. This is called cross-collateralization of income. Obviously, the more income you can document via tax returns and/or bank statements, the less risk your loan request poses.
3. Cash on hand
– in lieu of income, hemp debt lenders will consider your bank balance for cash to establish ability to make your loan payments. This may come from your own savings personally or from your business. It can also come from capital raises you have completed with cash in the bank. Having a sufficient amount of cash in the bank assures the lender that you will be able to carry your business and make the loan payments. If you are pre-revenue
, a hemp lender will want to see that you have enough other income or cash on hand to sustain your business for 6 months of operation prior to income being generated for your new business.
4. Business Foundation
– how ready is your business to be successful? The lender will require that you have all the required municipal and state licensing and permitting in place prior to your loan request being funded. They will also prefer that you have suppliers and buyers.
For example, if you are a hemp extraction company, the lender will prefer that you have contracts
with farmers or other suppliers for the raw material hemp that you are extracting. Likewise, if you have contracts with buyers for your finished product, you are seen as better positioned and more ready to operate your business successfully. As such, you pose less risk to the lender because they see that you have taken the time and effort to establish a solid foundation for your business to succeed.
5. Management Team Experience
– some owners of hemp businesses have no experience in the hemp business. If that is the case, they will want to have people on their team that do have experience in order to subvert major mistakes made from not knowing the ins and outs of the business and marketplace. This goes hand in hand with business foundation.