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Cannabis Purchase Order Financing

Cannabis purchase order financing is gaining speed in the industry. Because of robust state regulation, high operational costs, high taxes, and the federal illegality of marijuana, a lot of cannabis businesses struggle financially in their day to day business operations. Approaches to this problem takes various shapes and forms across the industry. There are threats of tax revolts, convoluted corporate structures to avoid the impact of IRC 280E, and skirting state regulations (looking at you, “burner” licensees). However, some intelligent solutions exist, and one of those is cannabis purchase order (“PO”) financing.

I’m seeing more cannabis PO financing agreements to help prop up cannabis businesses as they move on from start-up phase. This post is dedicated to cannabis PO financing agreements, how they work, and the pros and cons of using cannabis PO financing.

What is PO financing?

PO financing cannot be used for the provision of services or materials. It’s financing specifically reserved for businesses that lack funds to buy inventory needed to complete customer orders. After executing a PO financing agreement, if a business cannot pay its suppliers to produce goods ordered by customers, a PO financing company pays those suppliers to manufacture and deliver the goods to that businesses’s customers. Customers then directly pay the PO financing company. Upon receipt of that payment, the PO financing company takes out its fees (functioning like interest on the financing) and remits the remainder back to the business.

How does cannabis PO financing work?

The interesting thing about PO financing is that it isn’t technically a loan and doesn’t operate like a standard loan agreement (which is good for state disclosure requirements around “financial interest holders” and “true parties of interest”). After a company receives an invoice from a supplier for customer goods, it can apply for PO financing to cover that invoice. Contingent upon the business’s qualification eligibility, including creditworthiness, operational history, customer payment records, etc., the PO financing company may approve the business for the supplier costs. It’s typical to get around 80% of those costs covered, as most PO financing companies won’t want to assume all of the financial risk. If all supplier costs are not covered, the business is on the hook to pay the difference to the supplier.

Usually, once the supplier delivers the goods to the customer, the business invoices the customer for payment. Hopefully, payment terms dictate that the business is paid upon customer receipt and acceptance of the goods. If the customer is entitled to pay over time (which is very standard in the cannabis industry), the PO financing company may elect to purchase the invoice (usually at a discount). This may be referred to as “invoice factoring.” Customarily, though, the customer just pays the PO financing company directly.

The pros of cannabis PO financing

While you still have to qualify with the PO financing company to get the financing, it’s pretty easy to meet standard eligibility. It is easier than getting a loan from a bank or credit union, which very rare in the cannabis industry. Another plus is that the PO financing agreements, themselves, have fewer restrictions and negative covenants than a traditional bank loan. They also have built-in collateral in favor of the PO financing company in the form of the customer invoice. PO financing is also usually non-recourse and doesn’t come with any personal or corporate guarantees.

The cons of cannabis PO financing

The primary downsides are:

Financing (let alone 100% of all supplier costs) is not guaranteed;
Fees can be really high to access the financing;
Financing is short term and only really good for temporary cash crunches; and
Customers work directly with the PO financing company, which tells them that you’re likely having financial issues.

Some additional cautions:

Because capital is increasingly hard to come by in cannabis, there’s likely going to be additional scrutiny and diligence into cannabis businesses by PO financing companies.
The PO financing company may also ask for additional security beyond purchase orders to ensure they get paid.
The PO financing company they require the cannabis companies to bear more of the costs of the transaction and to take on more risk around indemnification and reps and warranties than you’d see in a standard PO financing agreement.

I think a lot of cannabis businesses can benefit from PO financing. If you’re considering cannabis PO financing, make sure it’s appropriate for the business before pulling the trigger. Ultimately, you want to ensure that you know what you’re getting (and giving away) to meet your short-term cash flow needs.

The post Cannabis Purchase Order Financing appeared first on Harris Bricken.

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