How to Vet Your Cannabis Lender or Broker

In the crazy world of cannabis, one of the most frustrating experiences an entrepreneur will face is finding financing for an upcoming project. Between the lack of regulated banks and cannabis-centered private equity investors, most entrepreneurs will eventually be forced with learning about the potentially exasperating world of “Private Lending”.

There are literally thousands of private lenders and commercial loan brokers out there, all with different specialties and loan guidelines. Try googling “Private Lending Cannabis” and see how many names (of firms you’ve never heard of) come up!

Faced with these many choices, how do you know if a commercial lender or loan broker are reputable?

Rumors of banks offering lending options, and friends of friends who said they were able to obtain single-digit interest rates on cannabis loans might entice even the savviest of borrower into a false sense of confidence with the cannabis lending environment. In the cannabis industry, there are a plethora of brokers misrepresenting themselves to be direct lenders. In many cases, they require an upfront fee to engage their services and promptly disappear, or they present a bogus term sheet that appears to be from a bona fide lending source and charge tens of thousands of dollars for obtaining it. 

Eventually, prospective borrowers might, by some luck or a referral, wind up speaking with a firm who knows the landscape of cannabis lending. Real lenders with real funds in the cannabis industry who execute and underwrite credit facilities are not easy to find (there’s a reason they’re called “private lenders”-they’re very private!) and in many cases loan brokers with less than desirable business practices are found instead. 

To add to the confusion, legitimate cannabis lending firms often require engagement fees when onboarding a new client. A legitimate firm typically requires a $2,000-$10,000 fee, depending on deal complexity and size, that is applied toward their overall points and fees at closing. Essentially, it’s a deposit that requires the borrower to commit to that broker to lower their risk of the borrower going elsewhere or losing interest. It’s always possible that a borrower may decide to walk away from the terms after the brokerage has expended thousands of dollars in labor to obtain legitimate term sheets from bona fide sources. Legitimate firms hedge against this risk and ensure the seriousness of the borrower by charging an upfront fee.

The problem is that some brokers (they often misrepresent themselves as “direct lenders”) rarely fulfill the promise of providing real term sheets from bona fide money sources. They tend to accept any engagement fee regardless of whether or not the borrower truly has the ingredients to close a loan. Often, their intent is to collect engagement fees, and rarely, if ever, close a loan. 

So, how do you determine the brokers who are interested in the execution of your loan and not just the collection of fees? Here are a few tips:

• If your loan request is under $10 million and the broker is asking for more than $10,000 for an engagement fee, that’s a red flag that indicates they are purely focused on racking up fees prior instead of getting term sheets from real lending sources.

• If the broker or lender does not appear to be asking questions about the feasibility of the deal in terms of the valuation of assets, the background of the owners, and the disposition of the assets, then they are either inexperienced or they are only focused on collecting fees upfront.

• Legitimate brokers/lenders spend most of their time telling borrowers why they should not pay them to engage their services. “Fee collectors” often just tell borrowers what they want to hear.

• If the broker is not able to provide estimated ranges of rate and term, then they may not have experience in underwriting your type of cannabis loan. This could indicate that this is an industry in which they are inexperienced. 

• Ask about the loan broker or lender’s experience. Some brokers are really either real estate agents by background or are much more familiar with raising equity/selling companies. Just because they’ve been successful in these fields doesn’t mean that they speak the specialized lingo of a non-dilutive, collateral-based lender. This situation invariably leads to confusion, frustration, and failed deals.

• If the broker or lender has no website, or worse yet, the names and bios of the principals are not listed on the site, this could indicate trouble. You may end up dealing with a nameless chain of individuals who have no personal stake in your deal. A good broker or any other professional should be willing to put their name, and social networking reputation, on the line.

• If you are still in doubt about a broker/lender’s credibility and they do not provide references or a list of closed transactions from prior borrowers (with client names), then you may be correct in doubting their ability to help you.

So, in that case, why not just find a broker to work on pure contingency with no fees upfront? Seems like an easy solution, but here’s the problem:

If a broker is willing to accept your deal for free, that’s also a red flag. How is it a risk to you if you’re not paying an upfront fee to a broker? The answer is that a legitimate firm that accepts engagement fees from borrowers has done so because they believe they can execute the loan, and they have been paid a fraction of the fee in advance to work on the file. Firms that charge fees will get far fewer engagements than brokers who are engaged with no fee upfront. By accepting fewer engagements, legitimate firms limit their focus on files that have a strong chance of closing. Legitimate firms perform more efficiently by not taking files from borrowers who are either not serious enough about executing their loan to put some “skin in the game” or have little confidence that their own loan can close. This allows legitimate firms who charge a portion of their fee upfront to lower their risk by focusing on your file to get it to the closing table.

The broker who takes your request with no engagement fee is a what we refer to as a “file collector”. They might, on their timeline, shop your deal with a couple of lenders, or blast it out to 50 lenders (thereby likely destroying your chance of getting debt financing), but when they encounter any resistance or difficulty with a prospective funding source, they often simply move on. They may have a hundred or more dormant files on their desk, and all of the prospective borrowers are asking for progress updates on their loan that could be stalled because it was poorly packaged by the broker in the first place. And, if one of their newer files or older files start to get traction, your deal can stay on hold until such time they have time to try and do real work on your file. In the “file collector” world, they can’t afford to put too much time into your file if even a perceived snag occurs. We know this because we hear it from borrowers who engaged zero fee “file collectors” and watched their file age like fine wine while the broker pushed them off to handle other priorities. Those refugees, or at least the serious ones, often wind up at our firm eventually, or come back to us after they’ve incurred enough pain to realize that our engagement fees were far cheaper than the opportunity cost of not closing the loan in a timely fashion.

So, if you want your cannabis loan to move along on a priority basis and you really want to close and fund your loan, choose your loan broker or lender carefully, vet their backgrounds, and treat them like any other professional such as your accountant or attorney.