Cannabis financing: How to secure capital in a cash-only industry

Working in the cannabis industry means navigating a plethora of challenges. Some challenges change by the state you’re operating in, while others come down from a federal level, such as banking and financing. Whether sourcing capital from investors or fulfilling insurance-required protective safeguards, securing capital in cannabis can be tricky.

Understanding theft provisions for cannabis property insurance

One of the biggest challenges cannabis companies face, particularly dispensaries, is the risk of robbery. Operating a cash-only business makes you a major target for people with malicious intentions. Protecting yourself means you need a plan and cannabis insurance policies to back it up — including theft and property coverage.

But having an insurance policy in place won’t deter any would-be robbers, so there are also steps every storefront owner can (and should) take.

Best practices for cash businesses include:

• not leaving large amounts of cash on site overnight
• not allowing one employee to routinely transport large amounts of cash at trackable intervals
• rotating cash out of the register during the day to keep the amount in front low

Often there are also theft provisions listed in your cannabis insurance policy, including:

• Central station burglar alarms notify a security company or police station in the event of a break-in. These alarms usually have loud sirens and interior motion sensors.
• Video surveillance is operational all day, every day, year-round. Often theft policies will require that records of the videos be kept for at least 60 days.
• Security guards during hours of operation and hours of closure. Onsite guards can be significant deterrents to would-be intruders.
• Product security. Cash and cannabis products must be kept in a safe room (as defined by the policy) during non-operational hours. This clause may have additional clauses detailing the nuances of the safe or vault rooms.

Cannabis financing tips to attract investors

Investors are a necessary resource in the cannabis industry, particularly for businesses looking to scale. However, these investors have a specific set of criteria to ensure they see enough return on their investment for a substance that is still federally illegal. Primarily, investors want to know you can handle the money you already have before they give you more, so cannabis companies must prove their financial prowess.

How exactly do you prove you can handle cannabis financing?

• Your business has hit the benchmarks to move into the next round of investors: angel, Series A, or Series B.
• You have a research-based funding strategy that includes a clear understanding of your market, your audience, and your niche, a plan for how you’ll use the raised capital, and a plan for networking with investors.
• You’ve perfected your business narrative and pitch for any (and every) networking opportunity.
• You’re actively seeking networking opportunities, not just with investors but also with leaders of companies who have recently received investment.

Creating risk management plans to fit a cash-only industry

Managing risk in a cash-only environment is a tall order, especially since other emerging industries typically have a clear-cut financial path to follow. The nuances of the cannabis industry necessitate having a tailored risk management plan that accommodates these specific challenges. (Even better if you can work with risk management professionals specializing in the cannabis industry.)

The first step in creating any risk management plan is understanding your risk. Consider approaching risk management with a four-pronged plan:

• avoid
• mitigate
• transfer
• accept

Each prong has action items, so you can rest assured you have a safety net, no matter the situation.

You also need to stay on top of any changing regulations at the federal level. Descheduling cannabis or passage of the SAFE Banking Act could bring sweeping changes to the industry practically overnight.

Isaac Bock is the managing director at AlphaRoot. Contact him at info@alpharoot.com. Reprinted with permission from AlphaRoot.

ALM’s Cannabis Insurance Coverage Specialist designation provides insurance professionals with the insights they need to work with cannabis businesses. Visit www.nutraining.com for more information.

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How cannabis legalization in NY is affecting landlords one year later