Building a legal cannabis industry and allowing for cannabis financing in New York and New Jersey is no simple task. New Jersey passed its legal recreational cannabis law in 2020, but didn’t see the rollout of retailers until April 21, 2022. An employee of Apothecarium, one of the 13 dispensaries licensed to open on the first day of legal sales, described the day as “absolutely historic,” noting that people “have been waiting for this day for a very long time,” according to an article published in The Guardian.
Recreational Cannabis Financing: A Journey Rather Than a Destination
New York passed its recreational cannabis law in 2021 and worked hard to get dispensaries open in 2022, just coming in under their self imposed deadline with one dispensary opening on December 29, according to Daniel Fastenberg, writing for Reuters.
New York has taken a similar direction to programs in California and other areas that have focused on righting wrongs of the war on drugs, according to New York State Office of Cannabis Management executive director Chris Alexander. The first licensed business was a nonprofit known for its work fighting homelessness and AIDS.
Organizations seeking to launch a cannabis operation, whether that is agricultural, warehousing, manufacturing, or retail have a long road ahead of them as the industry expands in New York and New Jersey. Founders need to have a sound business plan, know their segment of the industry, seek the proper licensure, and acquire the financing necessary to support the launch and development of their business.
Financing Cannabis Businesses in New York and New Jersey
“When it comes to finances, business owners need to plan a runway from the first day they spend their first dollar to their breakeven and profitability targets. Without a plan it is very difficult to create a justification to lenders,” said jBartolo Capital Advisers founder John Tesoriero.
Tesoriero, a business and financing professional with decades of experience in the commercial banking points out that traditional lenders are rarely the providers of financing in the Cannabis industry. “First of all, Cannabis remains illegal at the federal level. That removes traditional bankers from the mix. In addition, with nonprofits and individuals who have overcome criminal sanctions in this area, a record can become an additional hurdle.”
That does not make financing impossible, however. Financial advisers such as jBartolo Capital Advisers create networks of private lenders and vet loan applications prior to submission. Attorney Lee Vartan suggests that future changes under a “Safe Banking Act” could change the scenario for borrowers, however the act as proposed was voted down in early 2023, meaning cannabis businesses still have limited options for banking and financing.
“Our goal is to set up borrowers for success. We vet the loan application, help them take steps to become more attractive as a borrower, and present the loan package to lenders that make sense.” According to Tesoriero, that reduces the number of credit pulls which can lower the borrower’s credit score and increases success rates for borrowers.
Matching Cannabis Borrowers to Lenders
One of the largest challenges Cannabis Business borrowers face is that they often apply for the wrong kind of financing. “Many founders start with a home equity line of credit or a lump sum loan based on an asset they already own, then use that to purchase equipment or to start construction. Most equipment can be financed up to 100% of the value of the asset with the equipment as leverage. Construction financing is tiered based on the construction plan,” said Tesoriero. Both loan types, in addition to commercial real estate, help to maintain cash on hand as well as to protect the borrower against over leveraging their business during the launch process.
Not every asset needs to be purchased, however. Often equipment can be leased at a lower monthly rate, allowing the business to remove repair and maintenance on the item from their forecast.
For businesses seeking commercial real estate from agriculture to retail, sourcing capital is an ongoing challenge. “We know private lenders and equity firms that know real estate and the cannabis industry,” Tesoriro said. Because traditional real estate lenders are not allowed by federal regulations to lend to cannabis related businesses, these networks of lenders are vital to the industry.
“Many operators in the cannabis space don’t want to see cash going to rent. By putting money into real estate they can reduce cost over the life of the operation, but that’s challenging if the lenders aren’t there or the loan package isn’t up to the lender’s standard. That’s where brokers provide the most support to business owners.”
It is important to remember that the business plan is the determining factor for the financing structure a business chooses. “I always recommend that a business work with someone who can evaluate their business structure, support the business plan by negotiating preferable terms, and ultimately provide a range of financing options to the founder,” Tessoriero said.
Contact the experts at jBartolo Capital Advisers.