Funding for hemp businesses is one of the biggest issues that business owners have to deal with when setting up a hemp venture. Even though hemp businesses are capital intensive, most financial institutions are skeptical about offering financing in this industry.
Hemp Banking Guidance has established laws regarding banking in the hemp sector, which should make it easier for hemp businesses to get funding from traditional banks. However, not many startups qualify for bank loans from the get-go. Consequently, over 80% of startups in the hemp industry struggle with financing and cash flow problems.
In order to survive, hemp businesses need to think out of the box and devise creative strategies for funding.
The first step is to spell out the financial needs of the business. These may include, but are not limited to:
- Purchasing or leasing equipment
- Purchasing raw materials
- Working capital
- Bridge capital
- Real estate capital
With this clarified and quantified, the next step is to find the best funding avenue that suits the business’ needs. Here are 5 sources of funding that a hemp business can access:
Venture Capital for Hemp Businesses
Venture capital is suitable for large-scale, long-term finance that is given in exchange for equity. Venture capitalists buy into the business idea,offer funding, and share in the risk of the business.
Venture capital can come from individuals, organizations, or investment banks. If the hemp venture succeeds, the venture capitalist takes part in profit sharing. Because they have equity, venture capitalists also participate in decision making in the hemp business.
Angel Investors for Hemp Businesses
An angel investor works like a venture capitalist, but an angel investor is a single individual.
Angel investors also buy into the business idea and offer funding in exchange for equity, which is usually 25% or more. Because they are shareholders, they also have decision making power.
A hemp business should consider having an angel investor on board when they need financing and cannot access it through other sources. The advantage of an angel investor is that the business owner does not have to pay the investor in the event that the venture fails. It is worth noting that angel investors take away control from the business owner.
Grants are funds that are given to businesses that meet specific criteria to help them achieve certain goals. The United States Department of Agriculture (USDA) offers grants for hemp research in the U.S. In order for a hemp business to qualify for a grant, it must comply with the laws and regulations that have been stipulated by the state and tribal regulatory authorities.
In 2019, the USDA issued close to $1 million in grants for organic hemp farming. The USDA, under the Agricultural Marketing Service (AMS), also issues grants to hemp farmers in different states under the Specialty Crop Block Grant Program.
Bank Loans for Hemp Businesses
Hemp businesses may be able to access funding from the traditional banking system. Previously banks were required to file Suspicious Activity Reports (SAR) when dealing with hemp businesses. However, this is no longer the case since hemp is now legal under federal law. This has made it less risky and less difficult for banks to transact with hemp businesses.
Some private financial institutions offer loans for cannabis and hemp businesses. They include:
- Cannabis credit lines
- Industrial hemp farms
Personal financing for Hemp Businesses
It is also possible to set up a hemp business using personal finance or soft loans from friends and family.
Starting a business debt-free may give your business a better chance of success, since it will not be overburdened with loan repayments from the get-go. Self-financing is called bootstrapping. Funds for bootstrapping may be obtained from personal savings, gifts, inheritance, liquidating personal assets, salaries, or retirement benefits.
Friends and family may also offer their help to fund a hemp venture. This money can be given in the form of a gift or a soft loan. Unlike bank loans, these are informal loans that may be repaid on more laid back terms. Before taking loans from family and/or friends, be aware that this could damage a relationship with a loved one if the business fails.