Invoice financing: What is it?

Cannabis business owners face unique challenges in financing their businesses, particularly when it comes to managing cash flow. Unlike traditional businesses, cannabis businesses operate primarily on a cash basis due to federal regulations that make banking with traditional financial institutions, such as banks, credit unions, and credit card companies impossible. When cannabis businesses have to wait on receipt of payment for their open invoices, it can create working capital strains and hinder business growth. Business owners looking to prevent cash flow interruptions should consider using invoice financing.

What is Invoice Financing?

Invoice financing is a type of funding that allows businesses to borrow money against the cash due from customers. When using invoice financing, a business receives a loan that offers partial repayment on outstanding invoices in exchange for a percentage of the overall invoice when the amount is paid in full. Invoice financing is especially beneficial to cannabis businesses because these businesses typically have a long lead time on open invoices, often waiting up to 90 days to receive payment. Invoice financing allows businesses to cover expenses and reinvest in operations and growth costs without worrying about cash flow.

How Does Invoice Financing Work?

Invoice financing is accomplished in four simple steps:

1. An invoice is issued to the cannabis business owner for goods or services. The invoice is due in 30 days and the business owner requests invoice financing.
2. A percentage of the invoice amount (approximately 80 percent) is deposited directly into the invoicer’s account from the lender.
3. The business owner uses the funds to increase production and profits. Financing fees accrue during this time until the invoice is paid in full to the lender.
4. The invoice is paid in full to the lender, who completes payment to the invoicing company minus accrued fees.

Under the terms of invoice financing, the borrower is paid directly by the lender and interest only accrues when the funds are used. Repayment terms are generally about 90 days in length, and fees are approximately 2.5 to 3.5 percent of the invoice amount and are assessed every 30 days.

What are the Benefits of Invoice Financing?

There are many benefits of invoice financing for cannabis business owners looking to manage cash flow. Invoice financing offers quick access to working capital, usually within two business days. That means you won’t have to worry about making payroll or keeping the lights on, because you’ll have your money fast. Invoice financing provides consistent cash flow, helping business owners focus on what’s important – growth – rather than worrying about daily balances. Invoice financing also allows you to be liberal in extending terms to your clients, because you won’t have to be concerned with managing payment timelines. Invoice financing is also flexible, so you’ll only accrue interest when you’re actually using the funds, helping to save money.

Who Should Consider Invoice Financing?

Invoice financing is an excellent option for business owners involved at nearly every level of the cannabis industry, but it is especially recommended for cultivators, distributors, manufacturers, cannabis brands, and ancillary companies. Other elements of the cannabis industry, such as dispensaries, may also benefit from invoice financing under certain circumstances.

Where Can I Get Invoice Financing?

Cannabis business owners are normally prohibited from working with traditional financial institutions thanks to federal regulations that still consider cannabis an illegal substance. However, commercial lenders specifically focused on the cannabis industry began operating in 2018, offering financing options to cannabis business owners. Because these lenders deal specifically with cannabis businesses, they are uniquely qualified to understand the financing challenges faced by the industry and are likely to offer invoice financing. When speaking with lenders, be sure to explain your financing needs and ask for guidance in choosing the loan product that is right for you.