Finding Financing for Michigan Cannabis Businesses

Starting a successful business in Michigan depends on many factors, including a marketable product or service, an organized and well-developed business plan, and a dedicated team (or individual). One of the biggest challenges for every aspiring business owner is obtaining funding for their new venture. Cannabis businesses face several additional hurdles when it comes to financing and funding.

No Traditional Banks and Lenders for Cannabis Businesses

Most businesses take out loans to purchase or lease property, buy equipment and inventory, pay licensing fees, and take care of other start-up expenses. Unfortunately, most traditional lending options (including banks and credit unions) are unavailable to cannabis-related businesses. Cannabis businesses are also ineligible for loans administered by the federal Small Business Association (SBA), a significant funding source for many start-ups.

Although cannabis use is legal under Michigan state law, it remains prohibited under the federal Controlled Substances Act. Making loans or providing other financial services for cannabis businesses could expose a bank to criminal liability for aiding and abetting federally illegal activities. Knowingly accepting cash deposits from or making loans to cannabis businesses may also constitute money laundering (under a loose interpretation of federal law). Additionally, since the Federal Deposit Insurance Corporation (FDIC) will not insure a financial institution that takes on “Existential Risks” such as these, banks steer clear of cannabis businesses.

Michigan Supports Cannabis Businesses

Finding financing for cannabis-related businesses is a little more complicated than other businesses, but Michigan provides many helpful business resources for budding entrepreneurs.

Individuals who have resided in a community disproportionately impacted by cannabis criminalization, are registered primary caregivers for a medical-use patient or have been convicted of a cannabis offense may qualify for fee reductions under the Social Equity Program. This program helps reduce the initial administrative costs of beginning a cannabis business, making it financially possible for a broader range of applicants.

Michigan recently eliminated its “capitalization” requirements to help reduce start-up barriers for all aspiring adult-use cannabis businesses. (Previously, applicants had to prove they had raised specific amounts of capital, a quarter of which needed to be “liquid” before the state would issue a cannabis-related license.) Removing this hurdle allows more new businesses to open and begin operations more quickly and easily.

Exploring Other Potential Lenders

The Michigan Cannabis Regulatory Agency maintains a Business Resource Directory that includes several smaller, locally-based banks that provide loans, mortgages, and banking services to cannabis businesses. Other lenders offer no-strings loans at exorbitantly high interest rates. As new cannabis operations grow and thrive, the number of willing lenders increases, and interest rates should become more competitive.

You can also explore the availability of personal loans not tied to your business. These depend on the strength of your credit, personal income, and other assets (such as real estate).

Reach Out to Private Lenders

Like other entrepreneurs, cannabis business owners raise money by asking their friends, family, and community members for private loans (or gifts). Some community groups have lending programs or grants for their members that don’t exclude cannabis-related businesses. Cast a wide net; explore potential connections through friends-of-friends, posts on your social and alumni networks, religious and social communities, and other relationships.

Many successful companies have “fairy tale” origin stories involving an “angel investor” that saw the potential in their founders’ concept and funded its development. While these opportunities can be hard to find, exploring all your options and pitching your ideas to any possible parties is worthwhile. Charity groups like Detroit’s Clean Smoke Community Investment Project can also help connect you with potential investors.

Creating a well-organized, comprehensive business plan will improve your success rate. Meet with a business consultant to help you create a plan that accurately reflects your projected start-up and operational costs, projected revenue, and other operational and financial details. Investing this time and effort may help convince others to invest their money in you.

Explore Crowdsourcing Platforms

Equity crowdfunding, or “crowd investing,” involves small investments by many individuals. Individuals can invest as little as $100 in exchange for equity or convertible debt (a loan that initially pays interest but can later be converted into a predetermined number of common stock shares). Some platforms specialize in the cannabis industry, like SeedInvest, Wefunder, or Republic, while other platforms (like Robinhood) offer cannabis stocks and investment opportunities among many investment options.

Seek Professional Advice

Putting together funding for a Michigan cannabis business can be confusing — and sometimes overwhelming. Borrowers generally can’t count on federal consumer protection laws to protect them from unscrupulous lenders or investors.

Private lenders may make a traditional, interest-based loan or ask for equity in your company. Before agreeing to any terms, consult a knowledgeable cannabis business attorney. They can ensure all legal formalities are correct, memorialize your financing terms, and help protect your business interests.