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Private Equity Financing for Cannabis Industry

Posted On: September 16, 2017 author Paul Kendall

The cannabis industry is growing rapidly and many business owners are taking advantage of the surge in the market, generating profits and building sustainable businesses for themselves. Similar to a gold rush, the individuals who are courageous enough to dive into the market to buy cannabis extraction equipment and take a risk are often the ones that will benefit the most financially.

Dealing with cannabis, either as a grower, processor, or distributor, can be risky depending on the point of view. As the legalization of cannabis and marijuana is up in the air, simply based on where you live and how quickly the law can change overnight, getting into business with marijuana and cannabis may not be an ideal business to get started with.

But for those that are willing to jump into a potentially risky market, the cannabis industry can be highly rewarding for those that stick it out.

Let's explore one of the ways to finance your cannabis business, whether you’re a grower and need cannabis extraction equipment, a processor, or a distributor. One option to finance your business is through private equity financing. 

Like all types of financing and other major decisions in business, there are advantages and disadvantages to going this route.

 

What Is Private Equity Financing?

 

Private equity is capital within your business that has not been officially noted on a public exchange, composed of funds from investors and private companies. These companies may engage in “buyouts” of public companies.

For business owners (including new businesses), private equity typically involves a substantial amount of money that is provided as funding over an extended period of time. Many private equity firms are interested in helping businesses succeed by improving efficiency and profit margins with the end goal of making a profit as a result of a sale of the business or IPO (initial public offering).

Below you’ll find some of the advantages and disadvantages to utilizing private equity financing in your cannabis business.

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Advantages of Private Equity Financing

 

Overall, one of the primary benefits of private equity financing for newer businesses is that it simplifies some of the complications of other financing methods and puts less financial strain on the business at large.

 

Reduced Financial Pressure

When using private equity financing, you won’t have to worry about a loan that needs to be repaid, which is usually the case with other forms of financing. You won’t have to worry about making a monthly payment for your “loan,” which frees up cash in the early stages of your business development. This can be particularly important for businesses that need a certain period of time to “ramp up” their sales.

 

Credit Issues Aren’t a Problem

Equity financing can be favorable for some businesses that don’t have the credit to back up another form of financing, such as a loan from commercial banks. This can be a preferred option for businesses that need funding earlier rather than later and don’t have the time to build up their credit scores to a more attractive amount to lenders for the cannabis industry.

 

Valuable Connections Through Your Partners

When using private equity financing, you are essentially developing a partnership with another individual or firm. As a result, you get to have a partner on your side that is not only financially sound, but also has a wealth of information, other resources, and a network that may help you to succeed in ways you couldn’t without them.

Sometimes private equity financing for any kind of cannabis business can be highly attractive simply for partnership or mentorship you receive and the connections and resources they bring to the table.

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Disadvantages of Private Equity Financing

 

While private equity financing may be a great option for many businesses in the cannabis industry, it’s not without its faults. Before you jump into financing of any kind, make sure you understand both the pros and cons. For private equity financing, overall you are giving up more control of your business and profits, so you need to be prepared to “share” in your progress and earnings in order to secure equity financing.

 

Loss of Full Profits

Although you may not be making monthly payments with private equity financing (e.g., to pay for your cannabis extraction equipment or other capital expenses), you will have to directly split the profits you make from your business. Anytime you’re sharing equity with your business, your partners will receive a cut of the profits anytime you are paying yourself. 

To some, this may not actually be a disadvantage when you consider the possibility of making significantly more money overall, that it’s better to pay investors when it means a total increase in profits.

 

Loss of Full Control Over Business Decisions

When you use private equity financing, you’re giving up some control over your business. Because you are selling a portion of your business, you have to start answering to shareholders in order to make various business decisions. This may be mitigated if you limit the percentage of your business that you sell in exchange for investment funds and partnerships.

 

Partnership Conflicts

Unlike in other financing methods (e.g., loans, leasing), there is the potential for increased tension between partners who may disagree with your methods. You’ll need to learn to compromise in some situations and to stand firm in your decisions for others.

 

Should I Use Private Equity Financing in My Cannabis Business?

 

In the end, you need to know what your overall vision is for your business. In some cases, it makes sense to take on private equity financing if you’re expecting your business to do well, but know you may not have the income early on to support leasing, loans, or other non-equity based financing.

In other cases, taking on investors and partnerships may not be worthwhile for your business, or if you feel confident in your ability to grow your business organically. If you give up equity in exchange for initial funding (for cannabis extraction equipment and other business expenses) or partnerships, you’re also going to be giving up a percentage of your net profits anytime you pay yourself or when you choose to sell your business to a larger company.

If you’re not sure what the best option is for you and want to get an outside perspective, you can give us a call and we’ll help you determine the pros-and-cons of different financing methods, including private equity financing, for your cannabis business.

 

Alternative Financing Options for My Cannabis Business

One option for individuals or teams that have a fund already developed is to simply pay for your cannabis business expenses out of your own pocket. This isn’t always an option for most newer businesses, but can be a great way to help you save money in the long term. An alternative would be to use your own credit cards to make the purchases you absolutely need for your business.

Another option that should be used as a last resort is getting money from friends or family. This can be disastourous in the end because getting money involving friends or family is usually a risky venture and can complicate things. But if you know a family member or friend that you can rely on and supports your venture, they can be a great ally in helping you get started.

The best option for all your cannabis extraction equipment needs is cannabis equipment leasing which will allow you to buy all the cannabis extraction equipment you need for your business and take advantage of a clever way to increase the amount of money you can deduct from otherwise taxable income. You’ll save money and increase profits by using cannabis equipment leasing to help fund your cannabis start up business or existing operation. 

At Trust Capital, we are helping business owners in the cannabis industry save money, lease cannabis equipment, improve their bottom line, and take advantage of cannabis equipment financing opportunities that aren’t available elsewhere. We can point you in the right direction for private equity financing and real estate financing for the cannabis industry. We've worked with the biggest and best companies in the cannabis industry to help them expand their operations.

Give us a call to discuss your best cannabis business financing options at 866-458-4777

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