How Cannabis Businesses Can Benefit from MCAs

Updated on:
March 15, 2024

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The cannabis industry has experienced tremendous growth in recent years, with more states legalizing both medical and recreational use. However, cannabis businesses often face unique challenges regarding business financing, as traditional banks and credit unions may be hesitant to lend to companies in this industry due to its complex legal status at the federal level. Fortunately, merchant cash advances offer an alternative financing solution for marijuana businesses, providing them with the working capital they need to grow and thrive. In this article, we’ll explore how cannabis businesses can benefit from merchant cash advances and how they can use this funding to support their operations.


The Challenges of Financing in the Cannabis Industry

Despite rapid growth and increasing acceptance, the marijuana industry (which includes recreational and medical marijuana dispensaries, grows, and CBD producers) faces numerous challenges that can hinder its progress and profitability.

First and foremost, the industry must grapple with the complex legal landscape surrounding cannabis. While many state laws have legalized cannabis sales for medical and recreational use, it remains a Schedule I substance under federal law, creating a conflict between state and federal regulations. This legal ambiguity makes it difficult for cannabis businesses to access financing options at banks and credit unions, which are federally regulated and often hesitant to work with these businesses.

Additionally, tax laws such as Section 280E of the Internal Revenue Code prohibit cannabis businesses from deducting most ordinary business expenses, resulting in a higher tax burden than other small businesses.

Another challenge facing entrepreneurs in the cannabis industry is the ongoing stigma surrounding marijuana use. Although attitudes have shifted in recent years, a portion of the population still views cannabis products negatively, which can impact businesses’ ability to attract customers and maintain a positive public image. Furthermore, the cannabis industry must navigate a highly competitive market, with new businesses from producers to marijuana dispensaries continually entering the space, leading to increased competition for market share and consumer attention.

Finally, the industry must contend with a complex and ever-changing regulatory environment, as individual states and local jurisdictions impose their own rules and regulations on cannabis businesses. This can create a patchwork of regulations that businesses must navigate to remain compliant, often resulting in increased costs and operational challenges. Despite these obstacles, the cannabis industry continues to grow and evolve, adapting to its unique challenges while striving for long-term success.

Legalization and Federal Restrictions

Despite the increasing legalization of cannabis at the state level, marijuana remains a Schedule I substance under the Controlled Substances Act at the federal level. This classification makes it difficult for cannabis businesses to access financing options, as FDIC-insured financial institutions must adhere to federal regulations.

Limited Banking Options

Many banks and credit unions avoid working with cannabis businesses due to the potential risk of violating federal laws. As a result, cannabis business owners often struggle to find suitable financing solutions to support their growth and operational needs.

In most industries, business owners have a wide variety of funding options: lines of credit, term loans, SBA loans, equipment financing, and more. Not so for cannabis business loans and alternative financing: anyone seeking cannabis financing must look to very specific lenders and business funding options in order to get the financing they need.

Credit and Collateral Requirements

Even if a cannabis business can find a willing lender or funder, it may face strict credit requirements and collateral demands that can be difficult to meet. This can be particularly challenging for startups or businesses with limited credit history.

What is the Solution: A Merchant Cash Advance?

A merchant cash advance (MCA) is a financing solution that provides businesses with a lump sum of cash in exchange for a percentage of their future revenue. This type of financing is not a loan, but rather an advance on future receivables. The repayment process is typically automated, with the MCA provider receiving a fixed percentage of revenue until the advance is repaid in full.

Merchant cash advances are not small business loans – or any other type of loan, for that matter. They’re a legally distinct form of financing, and for that reason are not subject to many of the laws and regulations that surround the lending industry.

Benefits of Merchant Cash Advances for Cannabis Businesses

Easy Application Process

One of the key benefits of merchant cash advances for cannabis businesses is the streamlined application process. Unlike loans, which often require extensive documentation and lengthy approval processes, MCAs typically have a simpler application process and faster approval times. This allows cannabis business owners to access the funds they need quickly and efficiently without needing to show balance sheets, business plans, tax documents and other stipulations that banks demand.

Flexible Repayment

Merchant cash advances offer a flexible repayment structure that can be particularly beneficial for cannabis businesses. Because the repayment amount is based on a percentage of daily sales, businesses with fluctuating sales volumes can benefit from lower repayments during slower periods. This can help to reduce the strain on cash flow and make it easier for cannabis businesses to manage their finances.

No Collateral Required

Unlike loans, which often require collateral to secure financing, merchant cash advances do not require the borrower to provide real estate collateral as security. This can be particularly advantageous for cannabis businesses, as they may struggle to find suitable collateral due to the nature of their industry.

Access to Working Capital

Cannabis businesses often require access to working capital to fund their day-to-day operations, such as purchasing inventory, paying staff, and covering other operational expenses and business needs. Merchant cash advances can provide the necessary funds to support these needs, helping cannabis businesses maintain their operations and grow.

How Cannabis Businesses Can Use Merchant Cash Advances

Expanding Inventory and Product Offerings

Cannabis dispensaries and other cannabis-related businesses can use merchant cash advances to purchase additional inventory, expand their product offerings, or invest in new equipment. This can help to attract new customers and increase sales, ultimately driving business growth.

Investing in Marketing and Advertising

Cannabis businesses can use the funds from a merchant cash advance to invest in marketing and advertising efforts, helping to increase brand awareness and attract new customers. This can include digital marketing campaigns, print advertising, or even sponsoring local events to raise visibility within the community.

Hiring and Training Staff

As cannabis businesses grow, they may need to hire additional staff members to support their operations. Merchant cash advances can provide the funds needed to recruit, hire, and train new employees, ensuring that businesses have the necessary manpower to manage their increasing workload.

Renovating or Expanding Business Locations

Cannabis businesses may need to renovate or expand their physical locations to accommodate growth or comply with changing regulations. Funds from a merchant cash advance can be used to cover these expenses, helping businesses to create an inviting and compliant environment for their customers.

Supporting Research and Development

Cannabis companies, particularly those involved in developing new products or technologies, can benefit from merchant cash advances to fund their research and development efforts. This investment can create innovative new products or services that set the business apart from its competitors and drive long-term growth.

Choosing the Right MCA Provider for Your Cannabis Business

When selecting a merchant cash advance provider for your cannabis business, it’s essential to consider several factors, including:

  • Reputation: Look for MCA providers with a solid reputation and positive reviews from other cannabis businesses. This can help ensure you’re working with a reliable and trustworthy partner.

  • Industry Experience: Choose a provider with experience working with cannabis businesses, as they will better understand the unique challenges and opportunities within the industry.

  • Transparent Terms: Make sure the MCA provider offers clear and transparent terms, including the advance amount, repayment* amount, and any additional fees. This can help you to make an informed decision and avoid any surprises down the line.

  • Support and Resources: Opt for an MCA provider that offers support and resources to help your cannabis business succeed. This may include access to industry experts, educational materials, or networking opportunities.

In conclusion, merchant cash advances offer a viable financing solution for cannabis businesses, providing them with the working capital they need to support their growth and operations. By understanding the benefits of MCAs and how they can be used effectively, cannabis business owners can make informed decisions and secure the necessary funding to help their businesses thrive in this rapidly expanding industry.

*Repayment in this context describes the process of repurchasing a merchant cash advance. It does not describe the process of repaying a loan. MCAs are legally distinct from loan products.

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