How to Finance a Cannabis Vape Company
Welcome to the second in iKrusher's series of informative blogs looking at starting a cannabis vape company. We aim to offer helpful hints, point out pitfalls, and spark ideas that may help you begin your cannabis vape business. These blogs look at many aspects of starting a cannabis vape company, including financing, marketing, hardware selection, and more. We present these blogs to inform and inspire, intending them to serve not as comprehensive guides but as jumping-off points for you on your business journey.
Starting Your Dream Business
In our last blog, we discussed the dream of starting a cannabis vape company. We looked at ways to differentiate your cannabis vape business and products from others, specific market niches to target, and some of the significant difficulties startups face in the cannabis space. Today, we will get more specific–this blog is about searching for financing for your startup cannabis business.
Let's get started!
Challenges of Cannabis
The challenges faced by companies in the cannabis industry are unique and numerous. These challenges are primarily due to complex and ever-evolving legal and regulatory hurdles; many are unique to the cannabis industry and often vary from state to state. Although cannabis is legal in many states, it's still (as of 2024) considered illegal federally. The Drug Enforcement Agency classifies cannabis as a Schedule I drug (drugs with no current accepted medical use and a high potential for addiction) along with heroin and cocaine. This classification causes cannabis businesses serious obstacles, including strict advertising restrictions, complicated licensing procedures, high taxation, and fierce competition, and you can see that cannabis startups often face an uphill battle for their operations. But the number one problem this Schedule I classification brings to cannabis companies is with financing.
Raising Capital
Every new company must secure capital for the inevitable costs of getting a business off the ground. From paying employees, leasing office space and warehouse space, and paying for equipment, supplies, etc., the list goes on and on. The bottom line is you need startup capital. Unfortunately, in the cannabis industry, you can't just walk into a bank and apply for a loan the way you can in most other sectors. It's more daunting and complex.
Traditional Bank Loan
A business entrepreneur would typically walk to their local bank and apply for a business loan to start their company. However, for the reasons mentioned above, traditional bank loans are not an option for companies in the cannabis sector. Until the day that the government reschedules cannabis to Schedule III (drugs with accepted medical use and a low potential for dependence), young businesses will have to search elsewhere for startup capital. But don't worry, there are other options. You might have to get creative.
Angel Investor
Finding an angel investor may be an option to help finance a startup cannabis company. Angel investors offer capital and guidance to startup companies in exchange for equity in the company. Partnering with an angel investor significantly benefits a startup cannabis vape company. Beyond providing capital, they often bring valuable industry knowledge to the table. By bringing strategic guidance and a possible network of contacts, depending on their business history and expertise, angel investors can often help new businesses navigate the legal and competitive landscape of the cannabis market. A drawback is that you have someone to report to who owns a stake in your company and gets a say in how it's run.
Family and Friends Loan
For those lucky enough to have access to a loan from a family member as an option, starting a company can be much easier. There is (usually) much less red tape, and the terms can be more reasonable. A handshake is sometimes all it takes to start your company. Are you lucky enough to have a rich parent, grandparent, uncle, or aunt? That's great! Prep your pitch, get your numbers straight, get a haircut, press that suit, and hit them up! Make them an offer they can't refuse. You never know. They may dig the idea and help you reach your mission's next step.
Alternative Lenders
However, for most, a family loan is just not an option. But what's an intrepid cannabis vape entrepreneur to do with no wealthy family member or angel investor to help? Don't fret; there are a growing number of alternative funding sources, including smaller banks (e.g., First Citizens Bank), credit unions (e.g., Credit Union 1), and cannabis investment firms ( e.g., FundCanna). This small but growing number of reputable companies have specifically made investing in cannabis startups their forte. So, a quick search in your state to locate lenders who may be able to help you. Then, contact one and start the process.
Self-funding / Bootstrapping
Self-funding or "bootstrapping" is the concept of building a business from scratch without any outside help from anyone. For those who pursue this path, it can be risky. Some of the world's biggest brands started this way. It often begins on a small scale—producing just a few products and taking them to market yourself. Then, step-by-step, you build your brand and scale up as you grow. Imagine starting by selling vapes from the trunk of your car, then moving to sell them from smoke shops and dispensaries, and gradually scaling your business higher and higher until you're able to open your own storefront and retail website. The sky's the limit!
One of the key benefits of the bootstrapping model is that all the possible profits are yours—there's no need to share them with banks, investors, or shareholders. But on the flip side, the risk is equally high, as any unforeseen losses fall entirely on your shoulders.
Alternative Financing Options
There are alternative ways to finance your dream. By thinking outside the box and exploring alternative funding methods, cannabis start-ups can access the resources they need to launch and grow. Below is a list of a few alternative financing options designed to help cannabis entrepreneurs secure capital and build a strong foundation for success in this rapidly expanding industry.
Merchant Cash Advance - A merchant cash advance (MCA) is a method of financing through which a company receives a lump sum of capital upfront. In return, they give a portion of future sales. But instead of the usual fixed payments, the borrower agrees to pay back the advance by providing the lender with a percentage of daily sales. This makes MCAs a far more flexible option for businesses. MCAs often have high fees attached and high interest rates, making them much more expensive than a usual loan. However, they are easier to qualify for, especially for higher-risk businesses.
Revenue-based financing - Revenue-based financing, or RBF, is an alternate financing method where investors supply cash to a business in exchange for future revenue. RBFs do not have fixed repayments like traditional loans; instead, repayments change depending on the company's income. With the repayment flexibility, RBF is ideal for startup companies with variable income streams. The borrower must repay investors until reaching a predetermined amount. This model works best for companies with consistent growth.
Equipment financing and leasing - Cannabis vape companies often need expensive automated filling machines or similar equipment to start operations. Equipment financing and leasing provide cannabis businesses with flexible options to acquire the costly machinery and technology they need to begin operations without the significant upfront costs. With equipment financing and leasing, cannabis businesses can repay a loan over time while gaining immediate ownership. This approach helps cannabis businesses conserve cash flow, manage expenses, and stay competitive by accessing essential equipment without a significant initial investment.
The Cannabis Financing Future
Moving forward, one day, the federal government will reschedule cannabis to Schedule III, allowing nationally insured banks to invest in cannabis businesses. When that happens, many more funding opportunities will open to companies and individuals in the cannabis space. But until that day, entrepreneurs, big and small, must think outside the box and do what they can to start their dreams.
In Closing
Once you've secured your financing, you're ready to move on to the next stage of your journey. Because financing is not the end of the story for a cannabis entrepreneur, next, you need to decide what vape hardware will be ideal for your concentrates and market niche. After that, we will look at the best ways to market your cannabis vapes.
Check out more of these iKrusher blogs as we explore other steps of starting your cannabis vape hardware company.
Happy vaping!
Disclaimer
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