Adam Stettner, CEO of FundCanna, joins Guillermo to discuss the financial challenges faced by small businesses in the cannabis industry. Adam highlights the underbanked nature of the industry and the difficulties in accessing traditional bank loans for cannabis funding due to stringent regulations. He explains how FundCanna provides flexible funding solutions to meet the unique revenue cycles and cash flow needs of cannabis businesses. The conversation also touches on the potential impact of cannabis rescheduling on taxes.
“I am a finance guy. I love math, and I love problem solving. My goal is to listen and learn, study an industry, and then try to design products that fits whatever pain or gap I am being told exists. My job is not to tell someone what to do or how to run their business. My job is to provide the money they need to achieve their goals or objectives.” – Adam Stettner
The finer details of this episode:
Episode resources:
Timestamps:
Introduction (00:00:00)
Introduction to the Cannabis Success Show and its focus on helping cannabis company owners scale their businesses and access expert insights.
Accessing Capital for Small Businesses (00:00:25)
Discussion on the need for small businesses, including cannabis companies, to access capital and the reasons behind it.
Adam Stettner's Background and Transition to Cannabis (00:01:13)
Adam Stettner's background in finance and lending, and his transition to focusing on providing capital to the cannabis industry.
Cannabis Industry's Underbanked Status (00:02:44)
Insights into the underbanked status of the cannabis industry and the need to unlock capital for cannabis businesses.
Impact of the Pandemic on Cannabis Industry (00:04:18)
The impact of the pandemic on the cannabis industry and the increase in demand for capital during that time.
Challenges Faced by Small Businesses in Accessing Capital (00:05:56)
Discussion on the challenges faced by small businesses, including cannabis companies, in accessing capital from traditional banks.
Role of Private Lenders in Cannabis Industry (00:08:48)
Insights into the role of private lenders, such as Fund Canada, in providing capital to the cannabis industry and bridging the gap left by traditional banks.
Credit Underwriting Process and Business Owner's Preparation (00:12:36)
Insights into the credit underwriting process and how business owners can prepare to increase their chances of obtaining funding.
Role of Bridge Funding for Larger Companies (00:20:43)
The role of bridge funding for larger companies in leveraging private lenders to meet immediate capital needs while waiting for traditional bank funding.
Managing Capital Needs for Cannabis Businesses (00:22:21)
Insights into managing capital needs for cannabis businesses based on their specific cycles and revenue events.
Understanding Revenue Cycle and Financing Options (00:25:15)
Discussion on the mismatch between vendor terms and revenue cycle, and the design of financing options to fit the supply chain.
Challenges of Retail and Cultivation Integration (00:25:54)
Exploring the different skill sets and capital needs of retail and cultivation businesses, and the need for understanding the revenue cycle.
Borrowing and Financial Understanding (00:26:49)
The importance of understanding the capital needs and revenue cycle, and the role of a debt provider in providing funding.
Vertical Integration and Financing Dynamics (00:27:34)
The revolving nature of financing for vertically integrated operators and the usage timelines for different types of businesses in the supply chain.
Cash Outlay and Borrowing Cycles (00:29:04)
Discussion on the cash outlay requirements for opening new stores, building out inventory, and the borrowing cycles for different business needs.
Managing Borrowing Needs (00:30:55)
The importance of starting small and right-sizing borrowing needs based on a relationship-based funding approach.
Financial Metrics and Borrower Evaluation (00:32:38)
Evaluation of borrowers based on inflow and outflow of money, and the significance of cash flow over credit scores in lending decisions.
Bank Statements and Financial Evaluation (00:36:55)
The importance of bank statements in evaluating the inflow and outflow of money for determining serviceability and lending decisions.
Impact of Rescheduling and Taxation (00:40:26)
Discussion on the potential impact of rescheduling and amended returns on the industry's cash flow and taxation burdens.
Industry Conferences and Contact Information (00:49:26)
Upcoming industry conferences and the availability of Fund Canada online for further information and communication.
Adam Stettner's Insights (00:50:36)
Adam encourages exploration and learning, emphasizes the value of diligence, and offers free conversations.
Building Relationships at Conferences (00:50:59)
Guillermo recommends attending conferences to build relationships and emphasizes the value of in-person interactions.
Helping Businesses Find Success (00:51:39)
Guillermo emphasizes the podcast's mission to help businesses succeed, especially in navigating capital challenges and cash crunches.
Promotion of Podcast and Website (00:52:20)
The host promotes the podcast and website for additional tips and strategies in the cannabis industry.
Intro (00:00:00) - Welcome to the Cannabis Success Show. If you're a cannabis company owner or operator who's ready to scale your business, grow your profits, and plant the seeds to take your business to new heights. This show is for you. We'll share expert insights, industry trends, and actionable strategies to help you blaze a trail of success in the cannabis industry.
Guillermo (00:00:25) - Welcome to the Cannabis Success Show. Today we're talking with Adam Stettner, CEO of FundCanna. Most businesses will need to access capital at some point. This is a great topic if you're a business owner or if you're a virtual CFO. Working with small businesses. Small businesses need to access capital for a variety of reasons. You know, inventory. You need to build up inventory before the revenue comes in or some businesses have the opposite problem where there's advanced funds from revenue and you have cash and you don't want to spend cash in advance, that you're going to need to fund your business. But, before we jump into all that, and can you just tell us a little bit about yourself, just your background and how you got into lending and cannabis specifically?
Adam (00:01:13) - Sure.
Adam (00:01:14) - And thank you very much for having me and fun kind of on. So, the, the quick version of this is, I've been in finance for over 20 years. Both consumer and commercial in consumer, I was in student loans, where I did about 14 billion in lending to, mostly recent graduates, consolidating their debt on balance sheet and servicing those assets. And then in commercial I did small business lending and there it was, every small business you could think of other than cannabis, we would provide access to capital. And there did about 3.5 billion to over 100,000 businesses and, and the and I'm leaving a lot out. But that's the basic because it gives a foundation for understanding, how lending works and what is needed and how to design product and service product. and, ultimately, during the pandemic, the transition to cannabis, during the pandemic, I was aware and followed the cannabis industry, but from afar, during the pandemic, it was highlighted as an essential business. And what that really meant, during the pandemic was that while all other businesses were closed, cannabis was open.
Adam (00:02:44) - And I was fascinated by this because I looked at this disparity of how the cannabis industry was viewed as illegal at the federal level, and still at many states at the level of many states, it was deemed illegal. And then every state has its own set of rules and regulations, some medical, some adult use, some both. and then some. Of course, just because of the hemp bill or the farmer, the farmer bill from 2018. Some have hemp but I started really digging in I was fascinated by this being deemed essential. And what I learned was, that, like all small business, cannabis is underbanked. Doesn't mean it's not. It's not that it isn't banked at all. It's just underbanked. So, the deeper I went, the more I realized that there was a need to unlock, capital for this industry and provide liquidity to the cannabis space. All businesses need money. As you said in your intro, it's really a question of when, not if and how that money gets used.
Adam (00:03:54) - And if you design a product that is designed for an industry with their pain points in mind, that capital really fuels growth and so, I set out to do that in 2021 by starting FundCanna and by January of 22, we had originated, our first assets.
Guillermo (00:04:18) - Yeah. You mentioned the, the pandemic being a good year in for cannabis. And so, I track, you know, for forecast for clients. That's kind of the foundation. And I've looked at some historical, you know, revenue on the retail side equals the size of your transaction's times the number of your transactions. And so, I've tracked by market the, the basket sizes. And during 2020 you could just see it skyrocket. But the transactions come down in some cases, yeah higher revenue. But you just see the difference in just how much folks are buying just in each transaction and turn out to be a good year and kind of a steady, decline since then. So, you mentioned not just cannabis, but small business in general is underbanked, right? I mean, we work with a variety of clients.
Guillermo (00:05:11) - Sometimes it's a new business owner altogether. Sometimes it's an owner that's buying from another company. We run into all kinds of issues trying to get a line of credit. and so that's usually debt through a local relationship is how we usually help our clients by making introductions or sometimes they're just great at having good local relationships, where they're able to get a line of credit. But it really helps to know, the banks But for the companies that don't have that access, is this where, you know, something like an option like fund, can it comes in for a lot of these banks, a lot of these companies that don't really have that access and or are they able to get it later on through a bank?
Adam (00:05:56) - Well, there are two things. First, if we talk because cannabis really is another arm of SMB, which you'll hear often used, small to medium sized business that doesn't mean what so many people think when they hear small business. Small business doesn't mean small in a literal sense.
Adam (00:06:18) - It's a definition that the Federal Reserve and the banking system use, and small is potentially tens of millions of dollars annually. and medium is tens of millions to maybe 100 plus million so, SMB is really the fabric of not only America, but the world. It's very rare for large business companies like Google, or Microsoft. but SMB in in banking if non cannabis you think of traditional businesses and let's stick to the smaller businesses. But retail restaurants, dry cleaners, construction contractors, general trade they all get declined by the very banks that they deposit their money in at a rate of 75 to 80%. So, when you talk about traditional SMB clients that you work with going to their local banks, those local banks typically are under serving. It's not that they're not serving. They're excellent at what they do. And I believe in the banking system and the way banks work. but they can't say yes to everyone. And the way their risk is structured and the way the system works, they need to mitigate risk through diligent underwriting, and they only take a very small risk share.
Adam (00:07:53) - So my prior business was to try to fill that gap. Now in cannabis, where traditional business is, let's say, 10 to 25% approval rate. Cannabis is zero unless there's real estate involved or unless you're a monster, of a company. banks, traditional banks are not lending to this industry. But even when they do. And there will come a point where they do, they're going to do it in the single to very low double digit approval rate that it will never be that, that banks are saying yes to cannabis in mass. They will say yes to cannabis at some point, but it will be very selective. And that is not dissimilar from traditional SMB.
Guillermo (00:08:48) - Yeah. And I think, you know, we talk a lot about, you know, banking and the progress around that and possibly, you know, with credit cards or branded credit cards entering, but even with, with safer banking, it's going to take some time. And to your point there, it could be years before, even if it is legal for a lot of these companies, the branded credit card companies and the banks too, to start to move forward on this.
Guillermo (00:09:16) - So there's going to be a need regardless of the reschedule or safer banking. they're on the horizon again.
Adam (00:09:23) - It's not there will be a need anyway, because if your dry cleaner gets declined 88% of the time, they don't need safer bank. they're already banked by 15,000 banks in the United States, but 88 to 80% of the time, that bank is saying no when they want to borrow, right? They want to buy equipment; they want to buy a new conveyor for the hangers. Right? So, you're watch the clothes go around the merry go round. The answer is no 80 to 90% of the time. So, and there is no safer banking. So, the reality is banks lend against hard assets most of the time they do provide credit lines to businesses, and they do that 20 to 30% of the time. If that business and the operator that is guaranteeing that loan has amazing credit and very consistent cash flow. I joke and it is a joke, although nobody likes the sense of humor that I accept.
Adam (00:10:25) - Maybe Larry David. It's awkward when I say banks are often like the police in that I respect both, and I need both, but they're rarely around when we need them. And that's just a harsh reality of banking, like me. They'll take my money, for deposits, they'll give me a mortgage. but then when I need a revolving line or I need money quickly, or I want to take a loan to expand a business, they're not great at that. They do it. And if my business is big and my credit is amazing and my cash flow and my track record and my time in business all have the right criteria, they'll be there for me. But again, 80 to 85% of the time, I'm sorry, 75 to 80% of the time that's not the case.
Guillermo (00:11:20) - Yeah. And I could tell like I've had a lot of frustration from clients. like you said anecdotally, you know, we've had a lot of our clients can, outside of cannabis, are able to get a line of credit.
Guillermo (00:11:35) - We've had a variety of situations. But the other part of it is just the frustration and the time that it that it takes to go through this process and move on to another bank. So, I always try to just keep all the options open, but that's another piece of it is just the time it takes for the underwriting and providing information. So, with that said, you mentioned the decline rate. Do you think there is a part of that that is also these companies just not putting their best foot forward in terms of how they're working with the lender to provide information, to talk about the business, to tell the story or do you feel like this underwriting is just pretty rigid, kind of check the box and it is what it is. And I ask the question because I worked in corporate for a very long time and, and then I went to work in, you know, my clients now are in the 2 to $20 million range where a line of credit with one bank be.
Guillermo (00:12:36) - But I've worked with a large business where we had a syndicated deal. 13 banks a lot of time was spent with the banks doing a quarterly call, going out to dinners, all that stuff, which would be overkill for a deal for a company in the, you know, 22 to $20 million range. So sometimes I'm trying to balance things like how much time and effort do I need to put in, you know, working with the lender, helping them to understand the credit. Talking through the financials, the story of the business and how much of it is just the lender is just checking a box. And so I guess that's a that's a the question there is, you know, how much what can a business owner do, especially one that's not working with the virtual CFO or has a finance team to be able to go through the credit underwriting process, whether it's with someone like FundCanna
or just a bank in general, to make sure they increase their chances so they don't fall into that 80%.
Adam (00:13:36) - So, well, there are two questions in there.
Adam (00:13:38) - The first is it common for underwriters to just look to check a box? And the answer is it depends on the larger the bank, the more the answer to that question would be yes. At very large institutions they have very rigid credit criteria. and so, you collect all the documentation and then you run through what are the ratios, do they clear the hurdles? And it's almost like a game of Plinko on prices, right? As the disc goes down, do you pass through the next gate? And that's big banks, smaller banks, credit unions. There's a little bit of elasticity or flexibility in credit. There's a little bit more interest in hearing the story but nonetheless, it still must pass credit now with non-bank or, what I would say, private lenders, which are really everybody but banks. There is typically a baseline of minimum criteria. like for example, at fund kind of we don't fund pre-revenue, so we won't fund startups. I'm a startup and everything I've ever done, but I have revenue.
Adam (00:15:01) - We won't fund Pre-revenue because it's impossible to adequately size the offer for financing if you don't know their ability to repay it. And if you can't see inflow and outflow of money and revenue, you don't know how to size something that would be serviceable, but beyond that, we have a lot of flexibility. So how? Then the second part you asked was how can somebody prepare and please correct me if I have the two questions wrong. But, but the best way to be prepared is first, what's your use of capital and how do you think having forget the story for the underwriter, for yourself as an entrepreneur, as a business operator, whether you're doing 200,020 million or 200 million, if you're going to borrow, how do you plan to deploy that capital and what do you believe your yield will be on that money? And if your return on that capital or your yield on the money, however you're going to spend it is greater than your cost of capital. You've cleared the first hurdle for yourself, which is yes, I should borrow.
Adam (00:16:14) - If the answer is no, then it's really you borrowing to survive or you're borrowing because you think you're supposed to? And then you should reflect a bit more on is it appropriate to borrow? If I believe the money will do more for me than the cost of the money? Green light on moving to the next step. The next step would be you want your financials and order basics, bank statements, PNL balance sheet. Very simple and nothing crazy. You shouldn't have to put a ton of time into that and if you have that in order, and you know that you've done your own litmus test of. Does this make sense? At a minimum, you're ready to explore. And by explore, I mean you want to know who you're applying with. And I would say there are a lot of, less than savory companies or individuals out there you want to know who you're working with, you want to know that they've got a good reputation, that they've got a history of doing this so that they know not only how to design product and how to service that service you, but that they'll be there for you over time.
Adam (00:17:27) - You're looking to build that reliable, repeatable relationship because it's not one and done. All business is going to use the money in a way that almost acts like revolving credit, whether you use it as such or not, you might draw a payback and then a month later, want to draw again. You want to develop a cadence or relationship with a source of funding that you can rely on. So, I would say first do your that that soul searching of will borrow money yield upside for me? If the answer is yes, get your financials together. due diligence on who you might want to apply with, and then even once you get an offer, do more diligence. You just want to know. Now, what I would say is these sound like a lot. It's not a lot. The process can take a day. It's not like a long-drawn-out thing. And then once you apply, depending on who you apply to, banks can take anywhere from 4 to 12 weeks (about 3 months) to issue a response.
Adam (00:18:35) - At FundCanna was 1 to 2 days. and once we have everything that that we've requested, which again, the package is not much more than I outlined already. and, and then funding can occur again another day. So, our, we can move as quickly as our client, but we're also happy to move as slowly as decline. In other words, the client's not sure there's no pressure. Right. It's never. You never want to take money until you are ready to take that money. And any funding source that pressures you is probably not somebody you want to work with.
Guillermo (00:19:13) - Yeah, that's a great tip and then the other piece of that is having that expectation because the need is there and so, 12 weeks (about 3 months) to get a no could be pretty detrimental, right, if you don't have various other options running parallel to that. And so that's a great point. And good to know that when working with FundCanna, it's a 1 to 2 days and to laid out that expectation ahead of time.
Guillermo (00:19:37) - So, what I've found.
Adam (00:19:38) - The only other thing Guillermo that that I want to say is there have been a larger number of clients, and by larger, I mean north of 50 but really there are a number that come to mind that are well north of 100 million that have used FundCanna as the bridge to the bank money. So, rather than waiting, they may have, let's just say there's one person in particular one company in particular that was waiting on a $20 million real estate loan but they wanted to put a down payment on the equipment that would be going in and so they leveraged us, so that they didn't have to wait for the because part of the real estate loan, there was a refi where they were drawing capital out. Some of that capital coming out was going to be used for equipment. So, they used us as bridge money because the real estate loan was going to take about three and a half months. We were able to give them money in four days and so, they were able to get these parallel processes going.
Adam (00:20:43) - And then when the real estate loan closed, they paid us off. And, and so you see that with some of these larger entities that are working with banks but do not have the luxury of time. They want the bank relationship, they want the bank money, and they are bankable, but they don't want to wait the 3 to 4 months. So, they use a company like ours for bridges too.
Guillermo (00:21:08) - Bridge it over. Yeah. And that seems to make sense that a larger, larger company would be able to think through that. And, and especially on, on the equipment side, it seems like common sense that you'd need funding for equipment. The piece that as we work with, with clients is, you know, we build a forecast more of a dynamic forecast if this changes, what is cash change? a lot of a lot of our clients, when they come to us, they've, they've built a basic budget. and then they're a bit surprised they can be surprised.
Guillermo (00:21:40) - Not in all cases we’re okay, your budget. Cost and revenue tell you this, but I didn't realize I was going to need the cash to build up inventory. I hadn't really understood the cycle of converting this inventory into cash. Eventually, as a retailer, we can have 30 days (about 4 and a half weeks) of inventory 60 days (about 2 months). And it's different across the supply chain. Right? And so, as you were talking earlier about how to think through that, how does one think of how much capital they need as there may be a cultivator or processor or a retailer to convert?
Adam (00:22:21) - What I look at is their cycle. So, for example let's say cultivator there their cultivation cycle might be 2 to 8 months. Right? And again, if they have multiple grow rooms that's a shortened dramatically because they have rooms on different cycles. manufacturer, let's say they're manufacturing, biomass into crude oil or crude oil into something refined tincture or vape pen, etc. They all have different cycles. Retailers may buy inventory and it might take them 2 to 4 months to cycle through the inventory.
Adam (00:22:55) - So, they have two events. They have a cash outlay event and then they have a revenue event. Now in retail there's a steady stream of revenue because they may begin to sell the inventory. Day two. but before they've returned all the capital that was laid out, it might take them 2 to 3 months. And then the profit comes from the sales beyond that but with a manufacturer that must buy biomass, they're laying out capital day zero they obtain the biomass. They begin their manufacturing process by the time they've completed manufacturing, done whatever testing they need to do, shipped and gotten paid. It's four months of dead money. And so, if you know your cycles and you know your client or customer buying habits, your inflow and outflow, you can begin to use money like we offer at fund to, to bridge that too. So, it's not just bridging bank finance, it's you're smoothing out your revenue cycles. You let someone like FundCanna provide you with capital so that you can buy biomass without having to have dead money.
Adam (00:24:08) - And then you make small micropayments on a weekly basis, let's say then you have your revenue event, and you pay it off. Now, it might be that by the time you have your revenue event, you've only paid. You've paid some down maybe 30% or so, but instead of having to lay out 100% on day zero, you've laid out 1/40 a week later, then another 40th two weeks later, and so on down the line. That's a lot more palatable. And what it does is it allows these operators, in the case of the manufacturer, to take on more orders, purchase more of the raw materials or goods that they're going to use to manufacture. And then when the revenue event occurs, pay down the line and start over again with another batch of orders. It doesn't have to be one drug. They can cycle through many tranches of capital, but the creative use of money occurs in every industry at every size of organization. What has been lacking for cannabis operators is the ability to do the same, and so they've been hamstrung by a number of things.
Adam (00:25:15) - COD or worse, in my opinion, terms that don't match the revenue cycle. So, you may have a vendor that gives you 30-day terms, but your revenue cycle is five months, so you have 30 days (about 4 and a half weeks), which is helpful. But you know, every day that ticks by now payment is due, but you still have four months to go. That just doesn't work. And that's really why we design products here to try to fit the supply chain and the ancillary vendors that service them, so that they did have a financing option that does work for them, which would enable them to fuel growth.
Guillermo (00:25:54) - Have you seen, whether in any industry or in cannabis, where I would say most business owners, if they've had one piece of the business, because the supply cultivation behaves very differently than retail, just a different skill set, and managing that kind of business. have you had clients that you work with that,they are on the retail and maybe adding cultivation and yet don't understand the needs of that piece.
Guillermo (00:26:25) - Is that something that you have to work through with them too, to try to understand the capital needs? Because I would say. cultivation has a longer cycle compared to retail. Right? And so, is that something you must work through with the borrower? As you're going through this or so, they always come to you already having that understanding.
Adam (00:26:49) - It's not that we work through that with the borrower. That's candidly, that's not the job of a debt provider, or someone that's providing you with funding. Unless there is going to be an equity partner of yours. My job is not to tell someone what to do or how to run their business. My job is to provide the money they need to achieve their goals. So, we, if someone were to ask us, hey, what's the typical borrowing cycle of a cultivator that we can answer? Sure. But if someone were to ask, what should we do? We're not in the business of advising people what no one knows better than an operator, what they should be doing.
Adam (00:27:34) - I am a finance guy. I love math, and I love problem solving. So, my goal is to listen and learn, study an industry, and then try to design products that fits whatever pain or gap I am being told exists to then tell somebody how they should do it. I'd be overstepping my bounds and so, I don't do that but what I can say to you is vertically integrated operators, which would be someone that grows and sells, for example. It is a huge chunk of what we do. I would say probably. I'm going to say probably, but I know the number. It's 22 to 23% of the clients we work with are vertically integrated. Just meaning they do more than one thing in the supply chain, and they may not do it all despite the name, but they're doing certainly more than one thing. And for vertically integrated operators, we do find the revolving nature is higher than, let's say, for a brand, where vertically integrated operators, retailers, cultivators, they're constantly drawing and paying down, they're using the money to fill voids and gaps and revenue cycle or to expand take on a new client.
Adam (00:29:04) - You must buy or open a new store. You must build out the store, fill the shelves with inventory and get it up. Those are they require cash outlay. Right. and and so even like, for a grower, they must then package their goods. It's wild. most people now, growers, cultivators think this way already, but most people don't think they think about growing plant. But they may have a room filled with plastic and glass vials, childproof bags, labels, lids and all kinds of things. All of that is also inventory and requires cash outlay. And then as that inventory is used to package their core product, they replenish. Well, that money had to come from somewhere. In the interim, it's sitting idle in a room and so, these cycles are all different. The usage timelines are all different. I can tell you the average, the average term people select with us is less than a year. And a third of our book, or our clients pay us in about 4 to 4 and a half months.
Adam (00:30:17) - One third. The other third continues to pay over their term, but they may, as they pay down, draw again. Now, in all cases, there's equal amounts of redraw. In other words, the people that pay early, they redraw again faster, but they don't redraw necessarily at a rate that is higher absent the speed and but hopefully that answers your question. just about the timing. We do see different terms for different verticals within the supply chain.
Guillermo (00:30:55) - Sure. And you don't want your, you don't want to borrow more than you need. And so that's why I asked the question is how one gets to that understanding if they don't quite yet have the experience of what that revenue cycle will look like, and how to start to think about it, right?
Adam (00:31:09) - The answer is start small. Right? If you think you need look, the nice thing is, if you're working with a source of capital that wants a relationship they don't want, like the quote unquote commission, you.
Adam (00:31:25) - That's not what you're. You don't want a relationship with a guy that is looking at just throwing files over the fence and getting a commission. You want to work with a direct source of capital that is looking for a relationship that can be there for you when you need them. And if you do that, if you think you might need arbitrarily 250,000, there's no shame in seeking the approval for 250, but drawing 50,000, because if it's relationship-based funding, they're not going to pressure you to take it all. They're going to say, take the 50 you think you need now and Guillermo, I'm here for you if you decide you need more. And that's right, because now you're right sizing. You're never going to draw more than you need. And at least with FundCanna, we issue a $250,000 approval. You can draw an increment as small as 10,000 or as much as 250, and you can do as many draws as you like and we're not we're not charging, like whether you take 250 or you take 25,010 times, the overall cost ends up being the same, so why not do it in piecemeal so that you're not taking on more debt than you need? Correct.
Guillermo (00:32:38) - Yeah. And you mentioned earlier that, you know, paying back the debt. I mean, that's the one that's as a lender. You're looking at the payback on the debt not all companies get approved, but what are you, what are you looking for in terms of financial? You mentioned that, you know, you wouldn't lend to Pre-revenue, I understand it. It's hard to tell how a company would pay back money if they didn't have a proven, a proven history. And some companies aren't generating cash flow, especially after taxes. So, what are you looking for in terms of profitability or metrics on the financial side, when you're evaluating a borrower to determine, you know, to look at the credit and determine if they will be able to pay the money back.
Adam (00:33:31) - So, we really work in reverse. It's inflow and outflow of money, what's coming in and what's going out. I'm candidly a little less concerned with profit, for any small business, but in particular cannabis because of taxation and the way things work in this space.
Adam (00:33:48) - But if you don't have inflow of capital, there's I don't know how to predict this. So, what we look at is inflow and outflow of money, and we determine what would be serviceable, and then we back into an amount that we'd be willing to fund. If we started with a funded number, it'd be very hard for us to determine what can be serviced. Now again, term will help that. But I don't know your revenue cycle. So, and, and I don't want to tell you what I think that should be. So, what we'll always do is go out for the max duration. And again, we try to be short term, less than two years and, but but the shorter the better for both of us, because the longer it goes, the more expensive the money is. And because you only pay for time used. And from my perspective, the quicker the money cycles, the less risk there is. So, which is why we put, every lender on Earth puts a time value on the cost of capital.
Adam (00:34:56) - So, from my perspective, that's what we look at. We look at the inflow and outflow of money. We look at the payment that can be supported. And then when you look at duration you can come up with a max dollar amount. Now the nice thing is we always try when I say nice for all parties and that we always try to leave control with the borrower, where often that's not the case in lending by giving the borrower control, they can choose how much to draw, when to draw it, when to pay it back. No prepayment penalty. All they're really doing is paying for time used. And what allows them is that again, I used the term elasticity or flexibility earlier. They can determine what I draw, how long I keep it out, when I pay it back, and then they can start that cycle again by doing that, what we've really done, or my I set out to do, my goal was to empower the cannabis industry to leverage access to capital in the way that worked best for them.
Adam (00:36:01) - And I say it's not all altruistic, and it's selfish only in the sense that I know it's not going to work for me if it doesn't work for them. So, what I try to do is design a product that works for them with the idea that by doing that, I knew there would be the highest likelihood of having them want to work with me. If I offer a product that doesn't work for the borrower, there's not going to be a high take rate. Yeah. So, I, I, I like to design products that work for the client first and then figure out how to make it work for functional.
Guillermo (00:36:38) - And as you're clear, you're evaluating the inflows and outflows. You're doing this just thinking through I'm a borrower, what I need to provide to you, for you to be able to determine what that looks like is these monthly financials, or what's the kind of information that an operator would need.
Adam (00:36:55) - The best source of information is bank statements. And this goes back to like our conversation earlier about safer banking.
Adam (00:37:03) - I've had 2200 companies apply from the cannabis industry with fund of 2200 applicants, and across those 2200 and, you know, it's a little bit higher than that, but there's not a single one that wasn't banked. Every single one of them uses the banking system and so bank statements are the best tool. Now, it's not that we don't look at other things. We do, of course, but bank statements show you every day the deposits and the withdrawals, the payments that are going out. And you can over time create. And we have again, I've been lending for a long time and my credit team here is very experienced. And so, we have ratios that we use, that we like to see. and, and then the serviceability of a payment based on that inflow outflow, other obligations that, it doesn't tell the whole story but it, it begins to tell a story. If you don't look at that. Someone can have the best Fico in the world. If you don't know what their cash flow is, you have no idea what they can service.
Adam (00:38:16) - Conversely, someone may have a mediocre Fico, but they may have very strong cash flow. And who would I rather provide capital to? I'll take arbitrarily a 640 Fico with good cash flow over a 780 Fico with weak cash flow. I'll take that every day because the Fico may be an indicator of history or intent, but if you don't have cash flow, it's meaningless. And again, I realize that it is atypical for a funding source to say.
Guillermo (00:38:55) - Yeah, yeah and so, from that standpoint, a company that maybe doesn't have monthly financials or like you mentioned earlier, that's that was one of your tips is to make sure your financials are in order. But for companies that are trying to get going much faster and get an approval within days, I mean, they have bank statements and it's relatively simple to go ahead and provide all that information. So, let's switch gears a little bit and talk broader about what we see in the industry.
Guillermo (00:39:25) - Because, you know, I was at last year's Benzinga and I know you're going to be at, we'll talk about some of the upcoming conferences that we're going to be at or that you're going to be at, capital. We talk a lot about the rescheduling and 280 going away and that being kind of like a source of capital for the industry but right now, you know, you've heard the big news on some of the MSOs are filing amended returns. true. Leaves been successful that cash they did receive the refund and there's other companies following on that are doing something similar. It's not a done deal, but do you see that, you know, across all companies being a big inflow of cash, of additional capital, if you want to call it that, back into the industry in the current year, either from the reschedule or from the, from the potential, amended returns that a lot of companies may start doing.
Adam (00:40:26) - So I can't speak at all to the amended returns because nobody knows what Trulieve did to receive $113 million.
Adam (00:40:37) - Or I think that's the number. nobody. Well, somebody knows, but whoever that somebody is did it isn't telling other people.
Guillermo (00:40:45) - Unless we want to make this a conspiracy podcast, then we can get into it, right?
Adam (00:40:50) - No, I'm saying they did it. So, clearly, they know.
Guillermo (00:40:52) - What the reason why. Yeah.
Adam (00:40:54) - Yeah, they I I'm not I'm not at all acting as if there's some, like, crazy conspiracy. I'm just saying Trulieve knows, but I don't know that the other operators that might be listening to this podcast know. And I can tell you with a lot of confidence that I do not know what they did. So, I can't speak to that. But what I, what I will speak to is, this concept of rescheduling. If cannabis is rescheduled to schedule three, then it is no longer considered, illicit at the federal level. The point of 280 was really to burden or tax, illegal, drug traffickers and dealers so that they couldn't survive. Now, I think it's crazy that the IRS thinks that people that are dealing drugs illegally, pre cannabis and post cannabis, that any of them are filing taxes and paying those taxes.
Adam (00:41:55) - So, now you have a legitimate industry that is legal in 38 to 40 states. And, and that legitimate legal industry is being burdened with a loophole in the tax code that basically says revenue derived from the sale of illicit drugs will be taxed without any benefit for cost of goods sold or cogs that is crazy. So, that needs to go away. The scheduling would do that, but so would rescheduling and if they reschedule from schedule one to schedule three, then 280 is no more. And the reason that is great. And this is what you're alluding to, Guillermo, but for the audience it is because right now there is no ability to use your cost of goods against your revenue. In other words, you do $100 in sales, you're paying tax on $100. Where in every other industry in this country, when you do $100 in sales, if the cost to drive those sales was $60, you're only paying tax on the Delta, the $40 and so, if we get rescheduling through now, the tax burden goes from $100 in the example to $40.
Adam (00:43:11) - And that makes a huge difference in free cash flow and an unencumbered balance sheet. Because even if those taxes are on payment plans or otherwise, they no longer must be held as a liability, and I think it would be huge. and for those that are paying their taxes, even if they're on payment plans, or paying, some kind of abbreviated, tax, it, it opens their cash flow. And what that would do is enable funding sources, banks and otherwise on real estate and companies like FundCanna to take into account all that cash flow and unencumbered balance sheets and potentially advance at larger amounts. The flip side of that is they may need to borrow less, but probably not, because the industry has been growing and will continue to grow. And even traditional businesses that have never dealt with two ATP rely on debt to fuel their growth. So, I view it as positive in many ways. No one wants to pay more tax than necessary and right now, this industry is overburdened.
Adam (00:44:30) - And I'm being kind when I say that it is overburdened with unnecessary, and restrictive taxes. It's absurd.
Guillermo (00:44:40) - Yeah. So, you're saying that for FundCanna? I mean, even if, let's just say the reschedule happens this year, you have an additional inflow of cash into the industry. I think the estimates are somewhere like a billion. And in the several billion, if you consider potential amended returns, there will still be a need for this type of lending. And it's even better because the approvals would get better, right? These companies have better cash flow positions, and the need would still be there. So, it's just a win.
Adam (00:45:17) - Yeah, it looks, I believe I'm an entrepreneur myself. I'm a business operator myself. The more empowered I feel and am, the more effective I will be as an operator and what that liquidity does or what the free cash flow does. It empowers the operators. It empowers whether you're a large public MSO or a small single owner operator, it's empowering to make unencumbered decisions.
Adam (00:45:56) - And, and that is what these cannabis operators deserve is to be unencumbered and empowered, and so, yeah, I think it's a win, but the flip side of that is then when you look at a business that owes pick a random number, 2 million in taxes, forget whether or not that gets forgiven or whether they're filing amended returns and whether that gets accepted or not, because what we need is guidance on that. And the guidance might come out and say, hey, for previous periods, we're not forgiving it because it was illegal at that time, but going forward or beginning in 24, it no longer is an issue. Whatever, whatever it ends up being will be a victory. Is it enough? Probably not. But it's a victory, and it will be a good thing and it will free up cash flow. And that is great. It's great for the operator and it's great for funding sources, banks and otherwise that are servicing the group because it gives a cleaner, clearer picture and it gives more serviceability.
Guillermo (00:47:02) - Yeah, and I agree with you going all the way back to my initial question in that nobody knows. We're all speculated. We don't quite understand the tax position. I will say that I think we just all need to be talking and helping each other on the on the whole situation and just sharing what we can so that operators are educated and understand the risk and the tax position that that they're taking but it just overall it's a win win. But we don't; we don't quite know how things will play out. Back to your point of we don't know, we can all make theories and share our opinions on what it might be. What it seems like to me is that the decisions are being made based on, you know, the individual operators, cash needs. it almost kind of may be cheaper to file and the amended return borrowed from the IRS, in some cases. And you are just it just and.
Adam (00:48:08) - You just froze, so.
Guillermo (00:48:09) - Oh, it just froze.
Guillermo (00:48:10) - Okay. Okay.
Adam (00:48:18) - I waved already. I did the wave.
Guillermo (00:48:19) - I told everybody, turn off the streaming services. okay. No, what I was saying is that, you know, my theory is that a lot of these companies are just assessing their needs and taking the necessary risk and in essence, borrowing from the from the IRS and in some cases, just assessing the risk and the cost of borrowing from the IRS based on the penalties and their individual tax situation. So, we'll see. I think we'll know a lot within the next year or so, how it all plays out. But in any case, you know, to your point, you mentioned whether the amended returns end up being a more of a win, a permanent thing for these companies. The rescheduling will bring in more cash and better profitability after tax to most of these companies, so we're getting close to the hour here. I always like to end with is there any place we can find you.
Guillermo (00:49:22) - Adam, are you going to be at any upcoming conferences?
Adam (00:49:26) - Yes.
Adam (00:49:26) - Yeah. So, we've got, I mean, the two that are, most. Well, I have the greatest proximity to us doing this, MGM pact is, next week, in Atlantic City. We'll have two members of our team there. I will not be there. and then the following week, which is mid-April, we will be at Benzinga capital conference just outside Miami. I believe it's in Hollywood, Florida and we will be there and, and, at both conferences will be presenting. We were just at Nicon as well, in Boston and presented there. So, we try to be wherever the industry is. We can't be everywhere all the time, but we're certainly trying but the other thing that I would say is whether people are attending the conference or not, they can always find us online at FundCanna.com and I would encourage people again, do your research and don't be afraid to give us a call and speak to us.
Adam (00:50:36) - There's no obligation. We don't charge for conversations. And, and I always say, and I say this, for my own benefit, too. It's a thing that pushes me across the line. I always feel like the only thing I have to lose is the opportunity. I always want to be exploring and learning and so I encourage people to do their diligence and check us out.
Guillermo (00:50:59) - The Conferences are a great place to build relationships to something that you said earlier about working with a lender that knows you and so, if anyone has the opportunity catch up with you at a conference, I strongly recommend that and just drop by, say hello. These conferences will be at impact in Atlantic City too. And so, it's just a great way to, you know, we all work virtually nowadays. But when we come together in person, we build relationships. And that's just what a, what it's all about. So, it was a pleasure catching up with you today, Adam. I know our audience will find this conversation hugely valuable with the insights you gave.
Guillermo (00:51:39) - And your information is in the in the show notes. and so, we're here to help, you know, we're here to help, we're here to help people find success. I mean, there's a lot of challenges out there. Capital is a key part to success. You mentioned some bridges. You know how to build your different strategies so you can get to the to the finish line and work through cash crunch and helping your business move forward. And you presented a lot of options and how to really think through that. So, thanks for joining us today. it was a great episode, and we'll see you next time on the cannabis show.
Outro (00:52:20) - Enjoy this podcast. Visit our website Anders cpa.com/virtual CFO cannabis to get more tips and strategy for achieving business success in the cannabis industry.