Is My Cannabis Business Eligible for a Merchant Cash Advance?

Is My Cannabis Business Eligible for a Merchant Cash Advance?
By admin October 13, 2024

The cannabis industry has experienced rapid growth over the last few years, with new businesses springing up across the United States and other countries where cannabis has been legalized. While this presents great opportunities for entrepreneurs in the sector, it also brings with it unique challenges, especially when it comes to securing funding. Traditional banking institutions often hesitate to provide loans to cannabis businesses due to the legal complexities and regulatory landscape surrounding the industry.

One potential solution for cannabis businesses seeking quick access to capital is a Merchant Cash Advance (MCA). This form of financing has gained popularity across industries, but many cannabis entrepreneurs wonder: Is my cannabis business eligible for a merchant cash advance? This article aims to explore the eligibility criteria, benefits, challenges, and other key aspects of MCAs for cannabis businesses. By the end, you’ll have a comprehensive understanding of whether an MCA is a viable option for your cannabis business.

What is a Merchant Cash Advance (MCA)?

Before diving into whether cannabis businesses are eligible for MCAs, it’s important to understand what an MCA is and how it works.

A Merchant Cash Advance is not a loan but rather an advance on future sales. In an MCA agreement, a business receives a lump sum of money upfront from the lender, which is then repaid by deducting a percentage of daily or weekly sales, usually from credit card transactions. This means that the repayment schedule is flexible and directly tied to the business’s performance. If sales are slow, repayment amounts are smaller; when sales increase, repayment speeds up.

The lender takes on more risk compared to traditional loans because repayments are dependent on the business’s revenue, not fixed monthly payments. However, this higher risk often means that MCAs come with higher fees and costs, making them a more expensive option than traditional loans. Still, their flexibility and speed make them appealing to businesses with fluctuating revenue streams, like cannabis companies.

Eligibility Criteria for Merchant Cash Advances

Eligibility Criteria for Merchant Cash Advances

While merchant cash advances are accessible to many industries, eligibility varies depending on the lender. For most traditional businesses, eligibility criteria for an MCA typically include the following:

  1. Business Revenue: MCA providers usually require a consistent flow of revenue from sales, especially from credit card transactions. This ensures that the business can repay the advance in a timely manner.
  2. Business History: Most MCA providers prefer businesses that have been operating for at least a few months to one year. New businesses with no established track record may find it more difficult to qualify.
  3. Industry Risk: Certain industries are considered higher risk than others. Businesses in highly regulated or volatile sectors, like cannabis, often face more scrutiny from MCA providers.
  4. Credit Card Sales: Since MCA repayments are generally made by deducting a percentage of daily credit card sales, having a high volume of credit card transactions is often a crucial factor.

Now, let’s see how these criteria apply to cannabis businesses.

Challenges of Securing an MCA for Cannabis Businesses

Challenges of Securing an MCA for Cannabis Businesses

1. Regulatory Concerns

The cannabis industry operates in a gray legal area, especially in the United States, where federal laws still classify cannabis as a Schedule I controlled substance. This creates a complex environment for financial institutions and lenders who operate under federal laws. As a result, traditional banks and even some alternative lenders hesitate to work with cannabis-related businesses.

Even though an MCA is technically not a loan, many MCA providers may still be wary of working with cannabis businesses due to these regulatory concerns. Federal illegality makes it harder for lenders to ensure compliance and maintain transparency in their dealings, which may limit the number of MCA providers willing to offer advances to cannabis businesses.

2. High-Risk Classification

The cannabis industry is often classified as “high risk” by financial institutions and lenders. This is due to several factors:

  • Legal Risks: Cannabis is still illegal at the federal level in the U.S., creating potential legal complications for lenders working with cannabis businesses.
  • Market Volatility: The cannabis market is relatively new, and its rapid expansion brings volatility. Regulatory changes, market shifts, and competition can significantly affect a cannabis business’s revenue.

Because of these factors, some MCA providers may charge higher fees or decline to work with cannabis businesses altogether.

3. Cash-Based Nature of the Business

Many cannabis businesses operate primarily on a cash basis because traditional banks are reluctant to offer credit card processing services. Since MCA repayments are typically taken as a percentage of credit card sales, this poses a significant challenge. A business that primarily deals in cash will have little to no credit card sales, making it difficult to structure an MCA repayment plan.

Some MCA providers may work around this by looking at other forms of revenue or creating alternative repayment models. However, finding such a provider can be challenging.

4. Reputation and Perception Issues

Even though cannabis is legal for medical or recreational use in many states, there are still reputational concerns associated with the industry. Some lenders may be concerned about public perception, which can influence their willingness to engage with cannabis businesses.

For example, a lender may hesitate to approve an MCA for a cannabis business out of fear of potential backlash from other customers or business partners who are not comfortable with the industry.

How to Improve Your Chances of Securing an MCA for a Cannabis Business

Improve Your Chances of Securing an MCA for a Cannabis Business

Despite these challenges, it’s not impossible for cannabis businesses to secure a merchant cash advance. Here are some strategies to improve your chances:

1. Work with Industry-Specific Lenders

Many traditional MCA providers are reluctant to work with cannabis businesses, but there are lenders and financial institutions that specialize in high-risk industries, including cannabis. These industry-specific lenders are more likely to understand the unique challenges you face and may offer more favorable terms.

Do your research to find MCA providers that have a history of working with cannabis businesses. Often, these providers have specialized underwriting processes that cater to the cannabis industry’s needs and legal constraints.

2. Maintain Clear Financial Records

One of the most critical factors for securing an MCA is having clear and transparent financial records. This is especially true in the cannabis industry, where many businesses operate in a cash-heavy environment. To increase your chances of approval, make sure you keep detailed records of your sales, expenses, and revenue. This can help MCA providers get a clear picture of your business’s financial health.

Consider using point-of-sale (POS) systems specifically designed for the cannabis industry. These systems can track your sales and generate reports that you can provide to lenders during the MCA application process.

3. Focus on Building Credit Card Sales

Since MCA repayments are typically based on credit card sales, it’s important to show lenders that your business has consistent card-based revenue. If your cannabis business is currently cash-heavy, consider ways to increase your credit card transactions.

Some cannabis dispensaries have started offering debit card and ATM services as an alternative to cash. While true payment processing can be hard to find in the cannabis industry, working with payment processors that offer compliant debit card solutions can help you demonstrate more consistent electronic revenue.

4. Be Prepared for Higher Fees

Given the high-risk nature of the cannabis industry, MCA providers are likely to charge higher fees and interest rates to offset the risks they take. Be prepared for this and factor it into your decision-making process. While an MCA can provide quick access to capital, you’ll need to weigh the benefits of fast cash against the potentially higher costs of repayment.

Make sure you fully understand the fees involved and how they impact your overall cash flow. Compare multiple MCA providers and negotiate terms where possible to get the best deal.

5. Have a Strong Business Plan

A well-thought-out business plan can make a big difference when applying for an MCA. Even though MCAs are more focused on your revenue and sales than traditional loans, lenders still want to see that you have a clear strategy for growth and success.

Your business plan should outline how you intend to use the funds from the MCA, how you manage cash flow during different seasons, and how you plan to handle repayment. The more confidence a lender has in your ability to repay, the more likely they are to approve your application.

Benefits of a Merchant Cash Advance for Cannabis Businesses

Benefits of a Merchant Cash Advance for Cannabis Businesses

Despite the challenges, a merchant cash advance offers several benefits for cannabis businesses:

1. Fast Access to Capital

One of the biggest advantages of an MCA is the speed at which funds are available. Traditional loans can take weeks or even months to process, but with an MCA, businesses can often receive funds within a matter of days. This is particularly helpful for cannabis businesses that need quick cash to purchase inventory, invest in marketing, or cover operational expenses.

2. Flexible Repayment Terms

MCA repayments are based on a percentage of daily or weekly sales, which means the repayment schedule is flexible and adjusts to the business’s performance. If sales are slow, the repayment amount decreases; when sales pick up, repayment accelerates. This flexibility can be invaluable for cannabis businesses that experience fluctuations in revenue due to seasonal demand or market shifts.

3. No Fixed Payments

Unlike traditional loans with fixed monthly payments, MCAs do not require a set repayment amount. This means businesses don’t have to worry about making large payments during slower months. Instead, the repayment is proportional to the business’s actual sales, making it easier to manage cash flow.

4. No Need for Perfect Credit

MCAs are primarily based on a business’s sales, not its credit score. This makes them more accessible to cannabis businesses that may have difficulty securing traditional loans due to lower credit scores or a lack of credit history. While a poor credit score may still affect the terms of the MCA, it is less of a barrier than it would be with a traditional loan.

5. Use the Funds for Any Business Purpose

MCA funds can be used for virtually any business purpose, from inventory and marketing to rent and payroll. This flexibility allows cannabis businesses to address their most pressing needs without the restrictions that come with other types of financing.

Drawbacks of a Merchant Cash Advance for Cannabis Businesses

Drawbacks of a Merchant Cash Advance for Cannabis Businesses

While MCAs offer several benefits, they also come with potential downsides:

1. Higher Costs

MCAs tend to have higher fees and interest rates than traditional loans. The total cost of the advance, often represented as a factor rate (e.g., 1.2 or 1.4), can significantly increase the amount a business must repay. It’s important to carefully evaluate the total cost of the MCA before committing.

2. Potential for Cash Flow Strain

Although MCA repayments are flexible, they are still based on a percentage of sales. During slower months, even a small percentage can strain a business’s cash flow, especially if expenses remain constant. Be sure to calculate how repayments will impact your cash flow during different sales periods.

3. Short Repayment Terms

MCAs generally have shorter repayment terms compared to traditional loans, often ranging from three to 18 months. This means that businesses need to repay the advance relatively quickly, which can create pressure on cash flow.

FAQs

Q1: Can a cannabis business qualify for an MCA with poor credit?

Yes, MCAs are generally based on a business’s revenue rather than its credit score. While a poor credit score may affect the terms of the MCA, it is not a significant barrier to approval.

Q2: How do MCAs for cannabis businesses differ from traditional loans?

MCAs provide an advance on future sales and are repaid through a percentage of daily or weekly sales, typically from credit card transactions. Traditional loans, on the other hand, involve fixed monthly payments and are based on the borrower’s creditworthiness.

Q3: Are there specific MCA providers for cannabis businesses?

Yes, there are MCA providers that specialize in high-risk industries like cannabis. These providers understand the unique challenges of the industry and are more likely to offer financing to cannabis businesses.

Q4: How long does it take to receive funds from an MCA?

The approval process for an MCA is typically much faster than for a traditional loan. Businesses can often receive funds within a few days of applying.

Q5: Can a cannabis business use MCA funds for any purpose?

Yes, MCA funds can be used for virtually any business-related expense, including inventory, marketing, rent, payroll, and more.

Conclusion

Merchant Cash Advances can be a valuable financing option for cannabis businesses that need quick access to capital but may struggle to secure traditional loans. However, securing an MCA in the cannabis industry comes with challenges, including higher fees, a lack of credit card sales, and the industry’s high-risk classification. By working with industry-specific lenders, maintaining clear financial records, and preparing for higher costs, cannabis businesses can improve their chances of qualifying for an MCA.

Ultimately, while an MCA may offer fast and flexible funding, it’s essential to carefully weigh the pros and cons to ensure it aligns with your business’s financial goals and cash flow capabilities. If managed properly, an MCA can provide the resources needed to grow and sustain your cannabis business in a rapidly evolving industry.