Although the U.S. cannabis industry was valued at over $13 billion in 2019 by New Frontier Data, those operating in this space do not have access to the country’s banking and financial system. Even during brighter days, this created significant obstacles to raising capital. Now, in the midst of the coronavirus pandemic, many companies are facing greater challenges when it comes to their finances and operating cash. For this edition of mg‘s Changing Habits series we spoke with chief executive officers Matthew Karnes at GreenWave Advisors and Lorenzo Nourafchan at NorthStar Financial Consulting Group to gain insight about how COVID-19’s impact the cannabis industry’s business capital.
There is no denying that COVID-19 is bad news for aspiring cannabis entrepreneurs.
“We have observed a notable shift in investor sentiment and thus a slowdown in demand for our service offerings,” said Karnes. “The pandemic has led to additional challenges for many companies that are in need of capital.”
Cannabis businesses could face more financial obstacles than just a lack of access to capital. The pandemic is causing massive layoffs. With federal assistance and stimulus packages only a temporary fix, consumers may simply lack the available funds to continue consistent legal cannabis purchasing.
“As individual disposable income levels decline, many consumers may switch to the illicit market which provides a cheaper alternative,” Karnes said. “I think it comes down to price and whether or not a cheaper alternative exists.”
Nourafchan has identified similar struggles when it comes to capital for the cannabis industry.
“We’ve seen almost a complete halt of equity investments,” Nourafchan said. “Investors seem to be only interested in debt financing.”
According to Nourafchan, the problem is compounded by the lack of access to banking.
“Since bank loans are not an option, the cannabis industry is subject to heavy interest rates ranging from 10 percent to 50 percent,” Nourafchan explained. “With cash flow and profitability being such issues due to all the cannabis tax and regulatory burdens, debt is usually not a great option for cannabis companies.”
As always, it seems the companies with a long-term vision are best positioned to weather this uncertain near future.
“The companies succeeding in this environment are the businesses that have focused on profitability, organic growth, and cash flow,” Nourafchan said.
As they say, true character is often revealed during a time of crisis. The cannabis industry has long survived because of its strong character and a community of determined individuals willing to rise up to any challenge thrown our way. Hopefully, consumers and lawmakers can see what is on full display.
“The results of the pandemic have shown the value of the cannabis industry,” Nourafchan said. “Where several industries have been decimated by COVID, many canna-businesses have seen a significant rise in sales year-over-year, with no slowing down in sight. All in all, we can all agree that the cannabis industry is here to stay, and deeming cannabis an essential business during the pandemic is a case in point.”