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Why the cannabis industry is turning to debt financing.
Debt funding is an option well worth considering. And more and more cannabis companies are. Here are two key reasons the cannabis industry is turning to debt financing.
One: The disappointing performance of the Canadian pubcos has had a ripple effect. Dampening the enthusiasm of equity investors. Not only for publicly owned companies, but for private cannabis companies as well. And two: As long as the industry is capital-constrained, borrowing against assets is the primary source of funding available to many cannabis companies.
In addition, consolidation – the most commonly predicted side effect of the COVID-19 crisis – is putting stronger companies from all of the industry sectors we serve in a position to increase their collateral portfolio.
Sale and leaseback transactions.
The sale of assets to a buyer who then leases them back – with interest, for a fixed period – to the seller locks both parties into a lengthy relationship. Usually 10 to 15 years. When analyzing this option as opposed to a straight debt transaction, especially in an industry as young and as volatile as legal cannabis, consider the length of time you may be restricted from pursuing other opportunities.
Asset-based lending. And convertible options.
Based on careful valuation of real estate and equipment assets, a cannabis company typically can borrow between 40% to 75% of asset value. Up to this point in time, most debt financing by cannabis companies was found in convertible options with low conversion premiums – which essentially have been delayed issuance/dilution of equity.
Wherever funding comes from or will come from in the future, count on Highway 33 Capital Advisory to keep you up to date with the latest trends and newest options.
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