Equipment Financing Basics

The cannabis industry is burgeoning, with existing firms working to gain market share and innumerable potential firms looking to enter the marketplace.

Regardless of the precise stage a business has reached, wisely investing in top-of-the-line equipment might well be the most important prospective capital expenditure any cannabis brand or manufacturer will make. Equipment can be expensive, highly specialized, and newly improved technological iterations are introduced at a frenzied pace.

Scaling while staying technologically current is a huge challenge that requires effective financing of modern equipment and technology.  Arranging for that financing via conventional avenues, cannabis companies soon realize, is no easy task. Companies quickly learn that accessing traditional debt markets — particularly bank loans — is difficult, if not impossible.

The business can consider equity capital raises ranging from an initial friends and family round, to a substantial venture capital-backed funding series. While there’s no question that equity funding can be both vital and beneficial for cannabis firms, there are drawbacks. Companies can anticipate elevated discount rates demanded as compensation for perceived high risk. Post-money capitalization structures will virtually always be dilutive and in many cases, proposed dilution is so substantial that it jeopardizes ownership control.

Finally, there is likely a misalignment between the time horizon of equity investments, which are frequently permanent, and the economic reality of using those funds to purchase capital goods, which depreciate significantly in value virtually immediately.

The ultimate salvation of the U.S. cannabis industry may well come in the form of non-bank specialty finance firms. Specialty finance firms typically provide financing structures to businesses unable to tap the broader capital markets. Such firms are beginning to offer cannabis businesses an array of mechanisms to access equipment and technology without dilution or onerous credit terms.

The beauty of specialty financing transactions — especially leasing and royalty structures — is that upfront costs for customers are minimized. For these businesses, where free cash flow and burn rate are vital, spending less cash at the outset is a huge leg up. Done well, with technology in hand, the business can throw off cash in the near term, allowing it to easily meet monthly payments.

The best specialty financiers will effectively allow companies to move forward with scaling efforts by ensuring that supplementary and next-generation equipment/technology is accessible at reasonable cost when needed.

Cannabis businesses that turn to specialty finance can often, when desirable, turn variable costs into fixed costs. In many cases, firms can avail themselves of notable tax benefits and deductions.

In theory, the emergence of specialty finance firms with subject matter expertise in cannabis technology is transformative, democratizing the industry and providing a level playing field on which those companies with the best business models and products will have the opportunity to prosper. However, not all specialty financing arrangements are made equal.

 

Here are some basics on our capital equipment leasing program including what items we will need to proceed.

 

We arrange Capital Equipment leases to companies such as equipment manufacturing companies, processors, growers and dispensaries.  Items that we typically lease are extraction equipment, roto-vap systems, chillers, cartridge filling equipment, lab equipment, generators and most of the more popular LED grow lights.  Any requested items below $10K will not typically qualify.

 

Our knowledge of the industry and extensive network of private investors helps us deliver solutions to achieve our client’s and partner’s financial requirements.

 

Our program structure is tailored to clients individually based on what fits their criteria.  Below are basic guidelines and general terms, however, each project is viewed individually and terms could vary slightly on a case by case basis.

 

Types of Equipment We Can Get Financing For:

 

Cultivation:  Lighting, irrigation, Security

Processing and Manufacturing:  Includes dryers, extraction equipment, distillation, refrigerators, packaging

Build-out:  HVAC, solar, generators, lighting

Testing:  Equipment for labs including mass spectrometry

 

 

 

Capital Equipment Leasing Basics

 

Equipment Lease to Own

  • $250K – $10mm
  • 24-48 Month Leases (principal + interest)
  • 30% to 50% down payment (Typically finance up to 70% of the equipment’s hard cost)
  • Personal Guarantee required (or corporate)
  • $1 Buyout at end of the lease term

 

Submission Requirements:

  • 2 years tax returns
  • 3 months bank statements
  • PFS – Personal Financial Statement from all personal guarantors (or up to date corporate financials – Profit &Loss, Balance Sheet)
  • Need to show the ability to pay down payment plus first 6 months of lease payments (cash on hand)
  • List of equipment from manufacturer – itemized quotes for equipment from the equipment manufacturer

Benefits of a Capital Equipment Lease:

  • Conserves working capital
  • Allows companies to better manage budgeting cycle
  • Inherent tax benefits
  • Master Lease Agreements make follow on transactions much easier.

 

Why work with us:

 

We have been serving this industry since the recreational initiative first passed in Colorado seven years ago.  We partner with the most reputable lenders and know how to get deals across the finish line.

 

Structure/Term Optionality: The needs of each customer are unique, and so we are able to offer a range of programs depending on the life cycle of the business and its unique circumstances.

Technological Expertise Throughout the Life Cycle: Elite specialty finance providers serve as valued business partners, anticipating customers’ needs and standing ready to meet them. Cannabis technology is specialized and it’s continually changing — different machinery may be needed for different processes and the innovation curve is steep.

White glove service: Financing is a complex, involved process and we go further, offering our clients comprehensive support throughout the process.

Success Story:

 

Situation: An equipment vendor needed financing for his customer. The vendor was going to lose the sale unless alternative financing was obtained.

Solution: An equipment finance agreement with a large down payment that compensated for the customer’s weak financial profile. The customer received an affordable monthly payment for the next two years.

Results: The vendor made the sale and is putting people to work in his factory. The customer is now maximizing their warehouse space with the new equipment.

 

Contact us to become our next one!

 

 

 

ABOUT THE AUTHOR

Elizabeth Morris