For cannabis companies seeking capital, the federally illegal status of the plant and its constituent products has not made the process easy. While private equity has filled the gap in many markets, with early signs of life in 2021 after a dry 2020, traditional bank loans are off the table.
“The lending business in the cannabis industry is very difficult for these merchants, because a lot of their income does not qualify for standard types of loans,” Paybotic CEO Max Miller said.
As in so many other ways, the cannabis industry is beginning to embrace financial norms that appear in other commercial businesses. Card processing is one. Merchant cash advances are another. A cash advance is essentially a purchase of a company’s credit card receivables that a particular business is expected to receive. It’s an unsecured loan, which means that it’s tied to credit card processing and that it’s free from some of the more stringent regulations surrounding secured bank notes.
“There's a difference between a loan and an advance,” Miller said. “An advance is like a personal loan. There’s a lot more flexibility in repayment plan and it's a lot less regulated in the way that we can distribute funds.”
Since its founding in 2012, Paybotic has served merchant cash advances to its clients. Typically, these advances represent 80% of a business’s monthly deposits. Let’s say a cannabis dispensary is depositing $100,000 each month. The way Paybotic has structured its merchant cash advances, that company might be eligible for up to $80,000 as an advance. It’s the sort of thing that can get a retail business from its status quo to its short-term expansion goal—or to a certain sales display buildout.
And in an industry cut off from classic bank lending services, it’s a clear path forward for retailers interested in growing their business. “Merchant cash advances have been around for quite some time, but in this industry they're relatively new,” Miller said. “The need for financial services in this industry is as important as any other agriculture business. I don't have a crystal ball, but I anticipate that when reform happens, more financial services will be available to cannabis businesses. And I'm not sure when they're going to be treated like flower shops, but I hope one day soon.”