The cannabis extraction industry is booming, and current players are looking towards winning a higher percentage of the market share. Also, many potential entrants are lurking.
Investing in high-quality extraction equipment with the latest technology is a significant capital outlay for any business brand or manufacturer in the cannabis sphere. Extraction machinery is costly, highly specialized and is exposed to the random change in technology with innovations happening every day.
Which brand of extractor are you looking for?
Achieving scale while ensuring the technology you are using is relevant is a challenge. It requires productive funding of new equipment and technology. Cannabis businesses quickly discover that financing through traditional sources is tough and frustrating. The usual financing avenues through debt markets, especially conventional bank loans, are hard to access. Who’s the last person you’ve heard of who has secured a bank loan for cannabis extraction equipment?
The venture can opt to raise equity from close friends and family in the first round eventually using venture capital funding series in later rounds. Though equity funding has benefits and is an essential option for cannabis businesses, it also has its cons. Companies are expected to accept huge discount rates as compensation for the considerable risk the investor perceives to be taking on. Furthermore, equity capital raises are always bound to be dilutive to the extent that the ownership control of the founders is threatened or eliminated.
Finally, using equity to buy equipment creates a mismatch in the time frames as venture capital investing aims at providing funds for long term investments whereas capital goods depreciate rapidly shedding a significant amount of their value in a short time.
The solution to U.S. cannabis financing may be achieved through non-bank institutions that provide specialty lending. Specialty finance institutions employ a variety of unique financing methods to enable businesses to access the capital markets. These firms have started offering cannabis enterprises a range of funding structures to purchase extraction technology and equipment without dilution of control or offering complicated lending terms.
The main advantage of specialty financing – especially royalty and leasing agreements – is that initial costs for the customer are reduced. These businesses are in the survival phase where free cash flow generation and burn rate are key survival indicators. A considerable cash outlay at this stage can be a huge stumbling block. If the financing is done well and operations accelerate, the business will generate adequate cash to meet the monthly payment obligations.
With the proper financing structure, top-notch specialty finance firms enable a business to scale by providing accessible and affordable finance to buy the latest extraction equipment and technology. Will speaking with a mechanical expert to determine which extractor is best for you, whether that be a closed loop co2 extractor, BHO extractor, or a 2lb closed loop extractor you need to determine which machine you need before moving onto the financing.
Cannabis companies that result in using specialty finance have the option of converting variable costs to fixed costs. Most of the time, these firms can take advantage of tax deductions and benefits that arise.
Hypothetically, the popularity of specialty finance institutions with excellent capacity and technical knowledge in cannabis technology is a game changer, opening up the industry and providing fair competitive practices for those businesses that have high-quality business models and superior products and allowing them to prosper. However, specialty financing agreements vary.
What are the 7 qualities of a great financier?
Superior and high-quality specialty finance companies must provide significant value to the customer in some ways. Key criteria to look for:
1. In-House Origination & Underwriting: Firms with their in-house origination and underwriting can drive the structuring and financing process quickly. They are not bound to seek authorization from external committees. Thus they can provide innovative, tailored hybrid structures.
2. Term Optionality: Each customer has unique needs; therefore it is vital to use a specialty financier that offers some programs, for instance, royalty, leasing, in addition to part exchange and refurbishment components.
3. Independant Equipment Consultant: This means that the specialty financier is also not the producer of the technology and machines being financed. Businesses prefer flexibility and a wide range of choices when picking the line of equipment to use. Independent financiers are best suited to offer the customer the most comprehensive range of equipment choices available
4. Customization Compatible: Customers are at an added advantage if they are not boxed into using one specific extraction procedure or a particular technology component. Superior specialty financiers will be technology and process independent and will provide solutions that are uniquely modified to suit the customers’ needs and business models.
5. Expertise throughout the life-cycle: The best specialty financiers are also key business partners, projecting future customer requirements and positioning themselves to meet them. The cannabis industry is rapidly evolving with new technologies and innovation coming up every day, which drive the need to refine processes and improve on equipment. It is crucial to identify a specialty financier who possess deep technical expertise on cannabis extraction, and who will offer sound advice in the whole life cycle.
6. Partnered with experts: Specialty finance is a new problem-solving solution. The best financiers aim higher, by providing detailed technical support solutions such as on-site training, repairs, installation, remote troubleshooting and diagnostics, standard operating procedures and process automation. The engineering firm your financier is partnered with should know what type of extracts you plan to create. Terp sauce extraction and distillate extraction are two wildly popular methods people are using to create valuable extracted products.
7. A Long Record of Excellence: It is very risky to place trust in financiers that do not have relevant experience and expertise in equipment financing and the cannabis extraction sector. Firms that a track record of delivering and management that is renowned for performance are very desirable.
Specialty financing in the cannabis extraction industry is an attractive investment venture that is guaranteed to offer off the charts growth and superior margins as well as considerable operating leverage. Industry leaders have established stable recurring sales models. Also, the opportunity can be pursued worldwide with equipment being easily shipped to other countries. The model meets the hurdle rate that is required by both investors and customers, providing a favorable outcome for all parties.
The cannabis industry is not devoid of its problems and challenges. But the rise of specialty finance is a welcome change that is transformative, and that will be important in accelerating growth in the nascent cannabis extraction industry.