Why you shouldn't sell equity to fund your business The lack of available debt funding in the early days of cannabis forced most companies to sell equity to fund their growth. Fortunately, today companies have other options, Chris Conner, the CEO of The Spin Capital Group joins Dan Humiston to discuss other funding options. He explains how they are helping cultivator, manufacturer, distributor, dispensary, or ancillary venture maintain their ownership with debt financing. Produced by PodConx MJBulls - https://podconx.com/podcasts/raising-cannabis-capital Dan Humiston - https://podconx.com/guests/dan-humiston Chris Conner - https://podconx.com/guests/chris-conner The Spin Capital Group - https://spincapitalgroup.com/
Why you shouldn't sell equity to fund your business
The lack of available debt funding in the early days of cannabis forced most companies to sell equity to fund their growth. Fortunately, today companies have other options, Chris Conner, the CEO of The Spin Capital Group joins Dan Humiston to discuss other funding options. He explains how they are helping cultivator, manufacturer, distributor, dispensary, or ancillary venture maintain their ownership with debt financing.
MJBulls - https://podconx.com/podcasts/raising-cannabis-capital
Dan Humiston - https://podconx.com/guests/dan-humiston
Chris Conner - https://podconx.com/guests/chris-conner
The Spin Capital Group - https://spincapitalgroup.com/
Dan Humiston: [00:00:00] Today at MTA bulls, we are joined by Chris Connor, the CEO of the spin capital group, Chris, welcome to the show.
Chris Conner: Hey, Dan, how are you?
Dan Humiston: I'm really great. And I appreciate you dropping by today to talk about financing cannabis businesses, which is always challenging. And I mean, securing funding is challenging for all businesses, but Chris, why is it so much more difficult for cannabis company?
Chris Conner: Yeah, I will say there's a few different reasons why cannabis is a very tough industry to find. One of the primary reasons was that initially in the cannabis industry, most of the financing came in the form of equity financing. Canada's was like a fairly new industry. The underwriting models for being able to evaluate a business and their ability to repay back alone, weren't yet established, also being a new industry.
A lot of the cash flows for these businesses, weren't developed a lot of companies had zero to negative cash flows and weren't able to support loan repayments. But I think what we've seen since about [00:01:00] 20 18, 20 19 is a lot more debt financing options opened up for these cannabis wide businesses. We're starting to see like a, not allow new lenders.
And be able to offer a financing options for these businesses and increasing the availability of capital for them.
Dan Humiston: You mentioned it. A lot of them.
started off as, as a. Just selling equity , to raise money. And I think so often founders don't appreciate how valuable their equity is until it's too late. And maybe some, you can talk about some of the benefits of debt versus equity.
Chris Conner: Yeah, absolutely. So I think really what a lot of cannabis-related businesses need to understand is that equity financing is probably the most expensive financing they're ever going to abstain. Once you give away equity, you really can't get that back. Whereas with debt financing, once you pay back alone, you're all clear of your obligations.
And. Equity financing definitely has a time and place, particularly for startups that don't have the cash flows to support loan [00:02:00] repayments. But if a company already has cash flows and they have revenue coming in, I think most of the time, it probably makes more sense to go for debt financing as opposed to equity.
Dan Humiston: Yeah, Especially , if the interest rate is in line. Of course, if it's like crazy interest rates that it probably isn't, but for, in almost every case, it seems like if, like you said, once you give that equity, it's gone, it's no getting it back.
Chris Conner: Yeah, exactly. And I think the good news is that what we're starting to see in the industry is a lot more lenders are starting to come up. And as a result, there's a lot of pressure on interest rates downwards, even though the fed recently increased rates. I think long-term cannabis is definitely trending towards lower interest rates and becoming a much more similar to.
Non-high risk industries in terms of cost of capital.
Dan Humiston: Yeah, I hope you're right. I hope you're right. With typical with typical bank loans, the borrower's usually required to pledge hard assets like their home or their car.[00:03:00] What many businesses don't realize is that. Other non-traditional assets have value. For instance, a cannabis license has value. What are some other non-traditional assets that you look at , as forms of collapse?
Chris Conner: Yeah, that's a great question. The license is definitely one of the most prominent ones, particularly in the states. I cap the number of licenses. Just by there being eliminate number of licenses, each license becomes inherently more valuable as a piece of collateral. We also see things like, for example the future receivables being used as collateral also invoices can be just collateral.
So there's definitely a lot of intangible assets that a lot of these cannabis related businesses might not necessarily be aware of when they're approaching the lending companies interest in obtaining.
Dan Humiston: Yeah, especially, like you said that , if you have receivables, like if you're in a company that, You send out all your products and , maybe you're distributing them all out to this, to the dispensary's and [00:04:00] you're on a 30 day or 60 day payment plan. You're sitting there with no cash waiting for these to be paid.
And that's where you can kind of bridge that void.
Chris Conner: Yeah, exactly. And I think, especially with cannabis in particular, with a lot of these companies suffering from cashflow issues being able to like factor their invoices and receivables is very important. They need money now and being able to have access to that capital quickly is of great value to them.
Dan Humiston: Yeah, I would definitely. agree with that. Let's talk about skippin capital your provide funding for cannabis companies. Can you explain how you do it and kind of walk us through your process?
Chris Conner: Yeah, definitely. So essentially what we do is we provide debt financing to cannabis related businesses using a network of capital partners. The reality of the industry right now is that each lender has a specific niche. For example, some lenders only one in particular states. They might have minimum maximum funding amounts, different term lengths.
They [00:05:00] might have different business preferences. For example, some lenders prefer to lend to cultivators others, give their best rates to dispensary's. There's also different underwriting guidelines. And the value that we bring to the table is that through our network of capital partners, we know that which lender is going to be able to provide the most competitive financing for a cannabis related business and their unique situation.
That would be one of the values. And the second value is that a lot of these businesses don't necessarily have experience acquiring capital for themselves. For example, if you own like farm, your main focus is on cultivation of cannabis. You don't necessarily know how to navigate a debt financing landscape.
And really what we're doing is we're helping guide these businesses, advocating for them and helping them secure capital as the most competitive. And giving them guidance through the entire process from start to finish.
Dan Humiston: Yeah, I can imagine that , it's probably pretty complicated, especially for somebody that's never done it before to put [00:06:00] together a bunch of different applications. Cause everyone's probably got a different application form and you're right. There's probably lenders that only focus on certain states are only focused on certain.
Sectors within the industry, which would make it even more complicated. And that's what you do is that you help them navigate that kind of eclectic landscape.
Chris Conner: Yeah, exactly. Really what we're doing is we're playing the role of matchmaker by looking over the potential borrowers file, looking over their financials. And then based off that, identifying which lender will be able to fit their unique situation. Most competitively.
I think like another value we bring is that a lot of these cannabis related businesses haven't necessarily obtained debt financing for their business before, since that financing is so new to the cannabis space.
So if they go directly to a lender and they might receive an offer, but they have no way to contextualize whether that's a good offer, whether the rate that you received is actually a decent proposition for them.
Dan Humiston: Can you walk us through the [00:07:00] process? Let's just say I saw an opportunity but I can't swing it through cashflow. I reach out to you.
What do I, what's the process.
Chris Conner: Yeah. So initially we have a discovery call where we walk through number one, what the use of funds is going to be, how much are requests. And then what we try to do is gain a holistic picture of your business. For example, what are the outstanding debts you have? What possible source of collateral can you use?
For example, , what real estate do you have? Are there licenses you could use as collateral? And then once we gain that holistic picture of the business, we take a consultative approach or we try to recommend specific avenues for attaining that. And we'll reach out to the Lennon Comey's on your behalf and try to secure different offers to finance your business.
Dan Humiston: As far as financials go. , you deal with startups all the way through. Companies that have been in business for awhile. Do you require so many months financials or do you need, do they [00:08:00] need to be audited or reviewed , what exactly are your criteria for the financial.
Chris Conner: Yeah, it would really depend on the product that the specific borrower's going after. For example, if they're going after startup debt financing, it's going to have different requirements and a real estate acquisition loan. I wouldn't say the financials have to be audited, although it would be nice.
And then really it's going to depend on their unique situation as to what kind of documentation.
Dan Humiston: Yeah, it makes sense. It makes sense , if I need a building and , and I want to a construction loan, it's going to be a lot different than if I'm a startup and I just need , cash to get me going and hire some staff. It certainly makes that would make a big difference.
Okay. as far as turnaround time, how long does it typically take to get a loan secured and actually have the money hit your.
Chris Conner: Yeah, that would depend on the product. If the cannabis related businesses looking for working capital, it can be very quick. For [00:09:00] example, a lot of these lending companies that provide merchant cash advances or term loans, the main value they bring is speed to funds. So. Sometimes we can see the funds here within 24 hours of somebody reaching out to us and applying.
Dan Humiston: Wow.
Chris Conner: Really all they're doing is just sending over the bank statements. The lender reviews, the last three months of statements evaluates the cash flows. And then from there if everything checks out, they're able to acquire funds pretty quickly. then obviously for other products, such as real estate acquisition loans, it might take a little bit longer just because those are larger deals and larger funding amounts.
Dan Humiston: That's a huge advantage over equity financing. The timetable is much shorter.
Chris Conner: Yeah. The thing with equity financing is that these investors are really evaluating the companies holistically because the time horizon for the return on investment is much longer. Whereas with debt financing, they're only evaluating your ability to repay back alone. There's a much shorter timeline for the lending company to be able to get a return on their investment.
[00:10:00] So, yeah, typically it's much shorter of a process to get a loan application, underwrite it and approve it as opposed to really investigating the company, learning about as team members, going through the pitch decks, et cetera.
Dan Humiston: I see, I see. Well, we're going to have links to spend capital on our show notes. So if you need funding for your business, but you don't want to give away any equity, I'm sure somebody just click the links in the show notes and want to spend capital's dedicated. Business financing specialists will be there to , guide you through this process.
Chris, this is a really interesting, I'm glad you're filling this void. This is something that's really needed in the industry. I appreciate you being on the show today.
Chris Conner: Yeah, absolutely. Thank you for having me then.