What Should I Pay for Cannabis Debt

Jared Shulman Jan. 26, 2021

What’s the background?

The cannabis entrepreneur is certainly not one to be trifled with.

Operators in the medical and recreational marijuana sector face countless roadblocks — regulatory, investment, skeptical friends and family — just to launch their business, only to discover it is very expensive to sustain their “going concern.” After years of gaining a foothold and seeing traction, one often finds that their business is still far from profitable and difficult to scale. When Snoop Dogg rapped about a Rolly on his arm and pouring Chandon, it definitely didn’t come from rolling the best weed as a dispensary owner.

So how can the savvy ganjapreneur tap the capital markets without risking operational interruption or dilution? Simply put, they pay for it.

Why is it so expensive?

There is a basic, ordinal ranking system that many small businesses use when trying to get a loan:

  1. SBA. $22.5bn / yr. No to cannabis.

  2. Banks. $700bn+ / yr. No to cannabis.

  3. Alternative Lending. $100bn / yr. No to cannabis.

  4. Private Investors. Unknown. Yes to cannabis.

As all cannabis operators have come to find out, the first three options are simply non-existent.

The SBA, a government association sure enough set up to support the capitalist, can offer very reasonable credit terms — in the very rare chance you qualify. Selling a Schedule 1 substance is a surefire way to disqualify.

Banks, the current occupant of your former neighborhood bookstore or RadioShack, are just beginning to offer cannabis businesses deposit accounts. Sadly, loans are a far cry from reality. Most banks, as non-cannabis, small business owners can attest, are quite reticent to lend — the failure rate of the average small business provides ample supporting evidence. Cannabis operators should not expect even a full rescheduling to change this for a very long time.

Alternative lending platforms like OnDeck and Kabbage were created to help fill the funding gap for small businesses rejected by options one and two. These fintech platforms will borrow money from larger institutions, like Credit Suisse or JPM Chase, and lend it out at a spread (i.e more than they borrow for). Not surprisingly, the institutional investors that back these platforms have a strict no cannabis clause leaving this option off of the table, too.

With almost $1 trillion in debt capital not available to the $20bn US cannabis industry, the primary source of debt capital falls on private investors.

Private Investor Debt Prices

For those following the cannabis debt markets as closely as we are (if so, please seek help), you have likely seen some appealing interest rates over the last several months.

Yield compression, financialese for “interest rates going in the right direction,” has been trending across the industry as more states open up and new investors eye an opportunity.

However, for those ready to seek an unsecured line of credit in the mid to low teens, please take notice. The rates you see in the headlines are nowhere near the actual price paid!

The reason is almost all debt investment in cannabis ship with convertible notes and warrants. The price of these options dramatically amplifies the cost of capital. Since it is really difficult to calculate the effective yield, investors will often use this tactic to price their loans higher than expected — with the added benefit of owning a potentially large stake in your business.

How it works

Beware of the options

  1. Interest Rate. This is usually priced between 10–25%. This is often times the smallest portion of the true cost of capital.

  2. Convertible Note. Most debt comes with an option to purchase equity at or near the current valuation of your company. This option will usually last throughout the term of the loan. We use the Black Scholes Merten model to calculate the average price of this convertible option (usually 100% coverage i.e the full loan can convert to equity). The average value (in terms of effective interest rate) is roughly an additional 25% per year!

  3. Warrants. Like convertible notes, these are very difficult to value when considering a loan. These warrants can vary from at-the-money (i.e the current value of your company) or a slight premium to absolutely free! In fact, one publicly traded company borrowed $1.5mm at 8% per annum with $1.5mm in free warrants! Once again, using the BSM model we can apply another 25–35% premium from these warrants, too.

After considering the true cost of capital for these publicly traded companies — adding the interest rate to the price of convertible notes and warrants — it can seem rather alarming. The example above suggests a range of 60 to 85%. And if you plan on growing more than 30% per year, the rate balloons to over 100%!

That said, these high rates are arguably inline with the significant risk and lack of options in the market (at least according to Adam Smith).

Not only that, private debt investors will often qualify your business much faster than equity investors, provide more funding as you grow, and even reduce rates over time with good performance. When considering how challenging, expensive, and limited equity capital is (not to mention dilutive), private investors are often well worth their high rates.

Conclusion: Private Investors are not bad… but you better know the price.

Ultimately, as we’ve learned over the last several years in the industry, scaling your canna-business is no easy task. It takes great execution, a focus on compliance and regulation, and in most cases access to fast and secure capital.

Private investors are currently the only checkbooks serving the cannabis industry. If you’re fortunate enough to qualify for working capital, short-term finance, or even a credit facility, you should definitely consider the benefits of a debt investment. Just remember to consider and calculate all the options, warrants, convertibles, and other clauses we didn’t cover (collateral, triggers, etc) as these are often far more expensive than the price tag itself.

And if you are tired of flipping through loan docs or fearful of giving up too much equity, come check out more resources on starting, scaling and selling your canna-business at the Lendica Resource Center.


  1. SBA. https://www.sba.gov/article/2020/oct/28/sba-achieves-historic-small-business-lending-fiscal-year-2020

  2. Banks (estimate) https://www.sba.gov/sites/default/files/rs442-Small-Business-Lending-in-US-2016.pdf

  3. Alternative Lending. https://www.forbes.com/sites/moiravetter/2020/05/21/how-the-ppp-program-is-temporarily-disrupting-the-alternative-lending-market/?sh=4ac1fa86c053