By Scott Jordan
In my last article, I detailed several missteps commonly made by companies seeking funding in the marijuana industry, including some recommendations on what to avoid.
- Not asking the right questions before you start your presentation
- Bragging before sharing details and objectives of funding
- Not providing proof or samples
The following are three additional mistakes I see occurring frequently as marijuana business owners look for financing. Steer clear of these pitfalls and you will dramatically increase your chances for success.
Not understanding the investor or lender’s criteria
Since every funding source has a set of criteria for a business that it is looking to invest in or lend to, it is important to understand the source’s needs and assess whether your interests are aligned. It’s critical to gain as much information as possible before the initial meeting or filling out an application, but there are still pertinent questions to answer from the onset. To help understand whether a funding source is a good fit for you, here are some questions you may want to ask:
- What is your typical process for approval?
- Have you completed deals in the marijuana space before? (If yes, can you provide details and typical terms?)
- How much do you have allocated for an investment in the marijuana space?
- What information can we provide on your decision-making process?
Not personally guaranteeing the loans
One of the biggest turnoffs for a debt-based provider of capital is to hear that the borrower will not personally guarantee the loan. Put yourself in the lenders shoes for a moment. Would you want to give your money to someone who was not going to put everything on the line and do everything possible to repay your loan? Debt financing will require a personal guarantee and collateral in most cases, whereas equity financing generally will not.
With marijuana as an emerging industry with little historical data, countless rule changes and advanced regulatory compliance issues, there are a variety of events that can impair the ability to generate the cash flow to repay debt so having cash reserves is desirable.
Not having (and/or understanding) your financials
Debt-based lenders are interested in seeing accurate financials that are, ideally, reviewed or audited by a CPA. They are counting on the accuracy of your income statement to repay the loan and confirm that your balance sheet is accurately reflecting any liabilities. The following is a list of items to prepare:
- Personal credit report and your score. (If the score is below 700, provide an explanation as to why and a plan to improve it);
- Personal tax returns (three years);
- Personal financial statement;
- Debt schedule for the business, if applicable;
- Bank account statements (six months if in business);
- Pro-forma for income statement and balance sheet (for the next two years, minimum); and
- Merchant account statements, if applicable.
Best of luck to you on your pathway to finding the financing you need for your business.