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Cannabis financing has long been viewed as a complex and daunting challenge, largely due to the industry’s unique regulatory framework, market volatility, and limited access to traditional financial services. Having said that, as the market matures, more and more financing options will make their way into boardroom discussions as real scenarios instead of abstract ideas.
Some of the traditional and reliable ways to infuse capital include debt financing, equity, and working capital loans. But how does one even know which of those are applicable and effective?
“An indicator that debt financing may be necessary is when a company, whose business valuation has been affected by market conditions, seeks to raise capital without issuing new shares in order to retain maximum ownership,” says Dominic Daigle, managing partner of Agile Solutions, a Canadian-based financing firm that raises funds in various sectors including cannabis. “In that instance, debt financing could be a good way to preserve ownership of the company.”
Daigle adds that in 2018, at the time of legalization in Canada, cannabis companies had incredibly high valuations, some in the hundreds of millions. Now, when looking at the market, the scenery is quite different with valuations at a sliver of what they once were. This is why equity financing can prove to be a challenge right now.
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“If you want to raise $5 million and your company is worth $10 million, you need to sell 50% of your company,” he says. “In 2018 if you were worth $100 million and you needed $5 million, you would just lose five percent.”
Another challenge in the In the Canadian cannabis sector lies in the fact that receivables often extend beyond 30 days, with some invoices taking up to 60 or even 90 days to be paid. This delay can strain a company’s cash flow, particularly for smaller producers and ancillary businesses that need consistent working capital to manage operating costs, payroll, and inventory.
If this sounds familiar, invoice factoring offers an effective solution by enabling businesses to sell their outstanding invoices to a third party at a discount. It provides immediate cash flow without waiting for customers to pay, ensuring smooth operations while mitigating the risk of late payments. This is especially beneficial in a sector where payment terms can vary significantly depending on the size and liquidity of the buyer.
“We know in the cannabis industry most provinces pay in more than 30 days,” says Daigle. “If your client is not paying you at the time of the order and you need to give payment terms, you should consider invoice factoring.”
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There is also the option of a straight working capital loan, which can be a vital financial tool for cannabis companies in Canada, providing the necessary funds to cover operational expenses, such as payroll, rent, inventory, and marketing, during periods of fluctuating revenue.
With the highly regulated nature of the cannabis industry and ongoing challenges like seasonal demand and competition from unlicensed markets, access to flexible financing ensures businesses can maintain steady growth and manage cash flow effectively.
“As a general guideline, the fastest type of loan we have successfully funded in the cannabis industry offers the opportunity to access one to two months of revenue, amortized over 12 months, without requiring collateral,” said Daigle. “Let’s say a company is making $1.2 million annually; we can secure them a loan of $100,000 to $200,000 in about 5 days.”
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Cannabis companies may want to consider seeking financing proactively, when their financial situation is stable, rather than waiting until cash flow issues arise.
Securing financing when a company is financially healthy allows for more favorable terms, greater lender confidence, and the ability to plan for growth opportunities without the pressure of an immediate cash crunch. Conversely, waiting until a company is struggling can limit financing options and result in higher interest rates or stricter terms, as lenders may perceive greater risk. This is especially important in the cannabis sector, where market volatility, delayed receivables, and regulatory changes can rapidly impact liquidity.
“The best time to get financing options is when you think you don’t need them,” says Daigle. “Don’t wait until you need it.”
This post was originally published by our media partner here.