The CannaBusiness Advisory Spotlight Series features expert perspectives from Burns & Levinson clients and contacts who are blazing new trails in the cannabis market.
From your corner of the cannabis industry, what’s the single greatest challenge?
Like many emerging industries, the legal cannabis industry faces various challenges in raising capital efficiently and at attractive terms. The difficulty is even more pronounced in the early stages of a business’s life cycle. Founders, friends and family, and other angel-type investors often provide initial seed capital for the start-up phase. But most businesses exhaust this initial capital well before reaching stability and gaining access to traditional banks or other institutional financing. The vast majority of traditional financial institutions are still unwilling to lend to most aspects of the legal cannabis industry, leaving many cannabis-related businesses (CRBs) with few options to raise non-dilutive debt capital in modest size (e.g., < $20m) just as they are accelerating into their critical growth phase.
How does your business solve issues related to this challenge?
KreditForce LLC is an independent merchant bank dedicated to legal cannabis and related industries that are highly regulated. We provide debt capital to emerging and middle market CRBs, such as retail dispensaries, cultivation, and processing facilities, and others, who need between $2 and $25m in debt capital, often on a delayed and/or multiple draw basis. Unlike other lenders, our loans require no amortization for the life of the loan, which is typically between 3 and 5 years. We do not require equity participation of any type from the borrower. Most importantly, given our team’s cannabis and debt transactional experience, we can move from initial evaluation through diligence, underwriting, and closing more rapidly than most other financial institutions.
Tell us about a situation you’ve encountered that could only happen in cannabis.
A few years ago, I had discussions with the owner of a successful cannabis dispensary who was seeking debt capital to expand his business. He wished to acquire a small industrial warehouse not far from his dispensary to renovate and transform for indoor cultivation purposes. When discussing what additional collateral could be used to support the loan beyond the property itself, he offered to provide a significant amount of additional cash collateral in the form of actual currency. Upon further discussion, however, he indicated that the cash could not be physically produced for inspection because it was literally buried in a hidden location, and he was unwilling to share the location with us.
If you could travel back in time by ten years, what would you tell your former self about the industry?
I would tell myself that contrary to my expectations, it would take a significantly greater amount of time for full legalization and acceptance of the cannabis industry. Despite a recent public opinion poll showing that 68% of Americans now support federal legalization of the industry, by 2022, federal de-scheduling would still not be achieved, with continued uncertainty over that eventuality. Moreover, the SAFE Act would similarly not be approved. Thus, while still maintaining enthusiasm for the industry, I would caution my former self to plan for more extended delays of legalization at the federal level, and to a lesser extent at the state level. In addition, I would tell myself to carefully scrutinize the various state legalization statutes to be mindful of limited license versus unlimited license regimes, and how that ought to have a greater effect on the investment decision-making process.