Marijuana Business Magazine February 2019

Marijuana Business Magazine | February 2019 88 Moriconi said another red flag is if the funding originates from outside the United States. Foreign investments in U.S. cannabis companies are “clearly on the rise,” he said. The problem: It can be difficult to know exactly where the funding is coming from. “A typical ‘bait-and-switch’ involves (the MJ business) performing all the due diligence on the loan, but then when it comes time to cut a check, the funds are coming from another entity or person,” Moriconi said. “This is problematic since the cannabis company does not know who they are dealing with directly … and opens the (company) up to aggressive lenders who do not understand the cannabis business and the curve on an ROI (return on investment).” STRANGER DANGER An easy way to reduce the risk of being stung by a predatory lender is not to borrow from a person or group that you are not familiar with. “When someone cold calls you, there is a 99% chance they are not looking to offer you a fair rate,” KushCo’s Kovacev- ich said. “Stick with referrals and sources you know.” Experts agreed it is important to work only with professionals with a track record of making marijuana loans with reasonable terms. Kovacevich suggested business owners “build out a strong network” of reputable capital sources. In addition, lawyers, accountants and consultants who specialize in the cannabis sector can recommend reputable lenders. READ THE FINE PRINT To avoid predatory loans, closely examine the payback terms in addition to the interest rate, Ello’s Eneman said. “You may be facing excessive fees to close the loan,” he noted, “or be required to have additional penalties or possibly abusive and abnormal prepayment penalties.” For confidentiality reasons, Eneman declined to cite “real-life examples” but said he has seen operators saddled with short-term fees up to 40%. “This can create a significant cash- flow crunch,” especially if inventory and accounts-receivable collections are “already tight,” he said. In fact, it’s crucial when getting a loan to plan for possible cash-flow problems. A cannabis business owner, for ex- ample, may have trouble paying back a loan if faced with inventory problems or unexpected expenses. These issues can lead to a temporary cash shortage. And if a cannabis company is not generating enough money to keep cur- rent on loan payments, it could result in onerous penalties or force the business owner to accept a new loan with bad terms, according to Eneman. “Cash-flow issues are usually what cause the most problems for operators,” Eneman said. JUST SAY NO Despite the lack of traditional banking options, there is no shortage of lenders willing to make loans to MJ businesses. A Google search of “cannabis lenders” resulted in 848,000 hits. The key is to steer clear of the ques- tionable dealmakers. If you sense a lend- er may be questionable or simply trying to cash in on the multibillion-dollar MJ industry, trust your gut and take a pass. “Don’t be afraid to say ‘no’ if the loan looks shady,” said Moriconi, the Penn- sylvania attorney. In the short term, he added, that might mean adopting “lean business practices” and saving money at every opportunity until the right busi- ness partner or lender is secured. Marijuana's illegal status under federal law means predatory lending will remain widespread in the cannabis industry, according to KushCo CEO Nick Kovacevich. Courtesy Photo Shark Bait When someone cold calls you, there is a 99% chance they are not looking to offer you a fair rate.” —Nick Kovacevich