It’s almost always harder to raise capital than many thought it would be. Aside from the time frame, you need to have some solid knowledge when starting your business to move forward. Scott Jordan, founder of the Alternative Finance Network, is someone who, despite his expertise, also didn’t have it easy when starting out in the cannabis industry. In this episode, Scott talks about his hurdles when he first started his business and what transitioned him to the cannabis finance industry. He shares his knowledge about finances and things to remember about revenues and taxes.
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Understanding Finances In The Cannabis Industry With Scott Jordan
I look forward to sharing my next guest with you. His name is Scott Jordan. He is the Founder of Alternative Finance Network, providing access to funding for cannabis companies. Since 2009, he has been a pioneer in providing loans and equipment leases for cannabis companies. He has been called the Marijuana Money Man by Fox – San Francisco and the Denver Post. He created one of the first companies to provide access to debt-based capital, Dynamic Alternative Finance in 2014 and arranged over $30 million in funding. He has taken his existing private capital source and created an alternative funding network for cannabis business owners seeking funding for equipment, working capital, real estate, accounts receivable and project financing while helping entrepreneurs expand their businesses and keep their remaining equity.
He has a keen sense of timing and has been at the forefront of three other business evolutions having held key sales management positions in the telecommunications industry with long-distance provider, MCI, local exchange carrier, ICG and the first voice over internet international wholesale carrier ITXC. He is a commercial finance expert known throughout the marijuana industry. He has been interviewed by local TV and radio stations, authored articles and has been a featured speaker at national conferences.
Scott Jordan, how are you doing?
I’m doing great. How are you, Anthony?
I’m doing awesome. I’d like to find out what transitioned you into the cannabis finance industry? What story do you have on that? Everybody has one. I wanted to see what yours is.
Back in 2009, the dispensary that I was a patient at was complaining to me that not only he’s having a hard time getting a bank account, but he wasn’t getting any lending or any funding availability to him. I decided to take it on as challenge. I thought, I’ve helped other hard industries get financing, why not cannabis? I found it was more difficult than I thought but I prevail. I did end up getting him a loan. That was back in 2009 when you were changing bank accounts every week and had to pick up cash from this guy every Friday to make sure that the lender got paid. We got it done.
In 2014, when we went adult use legalized here in Colorado, I saw there was a tremendous opportunity and I like helping out the underdog. My grandmother used to tell me, “Help up the underdog and life will be good for you.” I enjoyed that and decided that I was going to help marijuana business owners find funding sources that were reluctant to come out into the light of day. They wanted to be involved in the industry and wanted to be leaders in the industry. They just didn’t want to put feet on the street and wave a big red flag for the government or other officials to give them a hard time.Oftentimes it's better to do what you need to do than to give up equity. Click To Tweet
You touched on banking. For a lot of our readers out there, especially in the newer markets, explain to them how difficult banking was back then. I know they may think it’s tough now but maybe if you could go into that a little bit more, it sounds like you’re pretty familiar with it.
Before Sundie Seefried came along who was the president of Partner Colorado, the credit union that has probably 80% of the market share here in Colorado. There was only a few credit unions and very small local banks that would even allow marijuana customer to come into their bank. It was very bad. Everybody was hiding their banking accounts. The banks didn’t know what to do to comply with the FinCEN and The Cole Memo. Most of them took the approach of, “I’m not going to go ahead and alienate my regulators here. When I find a marijuana account, I go ahead and close it.” Sundie Seefried at Partner decided to take that on as a challenge and she decided to bank as compliantly as possible within the rules that were set up at the time and then adjusted the time and was the first credit union to stick their hand up and say, “We’re going to go ahead and bank the industry and we’re going to do it as legally and compliantly as possible.” Thank goodness for her because she spawned many other children and stepchildren of her idea to bank cannabis businesses. Without her, it would be a much more difficult road for business owners to be able to get accounts. As you know, Anthony, it’s a nightmare trying to run a business where it’s all in cash. You got to pay your employees in cash which I heard is not even legal to do that because you’ve got to have some record of withholding and the other things. It’s ludicrous to try to run a business like that.
For those of you out there thinking that it’s tough, if anybody’s heard my story, I ran a couple of dispensers for several years and there was a point where we were paying our employees in cash. We would take the money out of the safe for our payroll and our payroll is every two weeks. It was about $100,000. It was pretty small. It was a lot of work. We have us four owners out there counting cash over and over again to make sure we were giving everybody the right money. We add to put it into our accounting, into our QuickBooks and then print out a sheet, deliver all the payments by hand to each one of the employees. We’d have them sign off that they received their full paycheck and the amounts were correct. After that, we had to go file that again. Every two weeks, we were doing this. This was happening before there was any credit union willing to bank us. As far as I know, there are still a few credit unions in the state that are doing that. Is that correct? Are you familiar with the ones that are doing it and are there new ones?
There are only a few banks that I know of that are doing it. At least, they’re raising their hand so that you’re not spreading out who is doing it because they’re afraid of getting flooded by new applicants and they can’t handle it. Almost all of them have waiting lists and even for ancillary accounts, which you would think would be easy, it’s not for the cannabis business owner.
You’ve mentioned the waiting list. I had sold a business, closed the account, came back two weeks later and said, “Can you sign me up on an account?” They told me that I had to get on the list. I was like, “Are you serious?” They said, “We’ve got hundreds of people on this list. When it opens up, we allow it.” I was nothing special even though I banked with them for several years which was very interesting to me because I still had some other accounts on there. What do you know about the Safe Banking Act and how do you see things progressing right now? It’s something that’s been pushed on the entire year but I’m not sure if it’s going to get moving forward at this point. Do you have any feedback on that?If you are looking into partnerships, you really have to vet your partners to understand who they are and what they’ll bring to the table. Click To Tweet
From what I hear, it’s hung up in our government bureaucracy there and it’s going to be tied to some other type of legislative action. Most of the insiders are not optimistic that it’s going to get done before the presidential. It’s going to be awhile I think. It’ll be stepping the right direction. What’s been happening though is quietly more and more banks and credit unions have figured out how to be compliant and are quietly banking the industry. Almost every state has more than one available choice for banking.
This is some good info for the business owner and the soon-to-be business owner. What kind of fees are involved within banking cannabis and what have you seen in requirements?
It varies so much. It’s unbelievable. I was talking to Oregon Business Owner. They paid $200 a month, flat rate, no fees for deposits and they think it’s expensive. I see it all the way up to $1,000 a month for an account and 1.5% of your deposits and electronic deposits may be reduced or investor money may be reduced but it’s all over the place. They have 21 bankers that are covering their 400-somewhat accounts that they have. That’s a lot of women power that you need to do that. I figure that they’re making $65,000 to maybe $85,000. I don’t know exactly but you’re looking at $1.5 million at $75,000 apiece. That’s a lot of money that has to go in to cover that portion of the overhead, let alone filing SARS and the other report.
Why do they need many people?
Because they watch every transaction that goes in and out of the account. Every transaction, any transaction that looks suspicious, they flag. What I didn’t know was the bankers are personally liable and personally responsible for anything that goes on their account. The credit union cannot pay for it through insurance or other means. They have to be hypervigilant. If they were convicted of money laundering or doing something, they’re going to be banned from banking for the rest of their life. Now, all of a sudden, they’ve got to find a new way in order to make a living. That’s a big penalty. The Wall Street firms don’t have that direct penalty. Goldman or any of the investment banks pay the fine and you’ll keep on moving. You’re not at the seven and eight-figure income in this side of the industry either.
You see that when legalization happens, a lot of us that are around the industry understands that that’s going to happen. We don’t know quite when. How will that change the lending parameters or how will that change business for guys like you and the smaller lending guys? Is this better for you? Is this worse? How do you see that shaking out?
It’s going to be large player with inexpensive money coming into the industry. They’re coming in now quietly. What’s happening is there’s one major bank that’s in Arizona, Nevada and California that is quietly doing real estate loans and taking deposits for the largest of the large accounts. There are Sundie Seefried started an affiliate program where she’s bringing on credit unions in other states where they’re doing the back office vetting and some of the other work. The bank in that particular state is taken the deposits and being the front-end. You’ve got several of the companies that are doing it privately. There’s a company called Dama Financial and other people are doing it, and advertising. It’s getting easier and easier. You’re getting more choices. In terms of the lending, it’ll be someone that will have a tolerance for risk and will want to bank those accounts as well because the challenge that you have in this industry is it’s so new.
You don’t have a lot of history and the accounts that you’re dealing with a lot of times are either public companies that are losing money but have raised a lot of money or companies where you need to have an equity upside for the lender to take into consideration the fact that that company is not performing according to how they would like to ideally underwrite clients. Meaning a real lender wants to see that you’re making money so that you can repay them. That’s what the Genesis of lending is. People ask me all the time, “Who qualifies? How do you know who qualifies?” It’s a real simple thing. There are only two pads in lending. One is do you qualify based on your current cashflow? Will the new payment that you’re going to incur be less than the profits that you’re making on a monthly basis? If you’re borrowing and repaying back $1, you want to be having your profit of at least $1.25 to $1.50 in order to be able to make that new payment.
If you’re buying equipment or a building and you can put down a substantial down payment, generally 30% or more, you can borrow from hard money equipment lenders and hard money real estate lenders because they will have enough equity in the property if they have to take it back if it’s the right type of real estate or equipment. We’ve had a number of equipment lenders that will lend based on the type of equipment. For instance, they will not lend on light but they will lend on extraction machines, on packaging, on other assets that command value at an auction and that’s how they’re lending it. They’re not lending it based on the cashflow of the business.
It’s higher risk lending because even if you’re into something with a 30% down payment, you still have to foreclose on it, get at the equipment, ship it back, endure the time before it sells, go through the auction and selling process. You’ve got a number of different expenses in addition to the legal to repossess it if you can repossess it, because unlike a building, equipment can move and may be damaged. It may not get what you thought it was going to get when you appraised it. It’s another option. It’s more expensive because it’s higher risk. It is out there and oftentimes it’s better to do that than to give up equity at the early stages of your business when your valuation is going to be least. You probably found that out with what you ended up doing with open.There is no shortcut in growing. It is a long haul. Click To Tweet
I’m starting to see at least on the financing side and especially with everybody going IPO right now and stuff is how does the business owner navigate? Should I sell a part of my equity for somebody bigger with money to come in or should I do this on my own? Go work with the smaller financing company. How do you recommend the small business owner and the startup guy work through that process? It’s probably deep but it’s worth discussing.
I suggest that people use debt as long as they can to get the valuation as high as they can if their ultimate goal is to sell out for a large number or be acquired. Debt is always going to be your way to provide capital from an application standpoint. More importantly, the personalities that are involved. I’ve heard many horror stories about partners particularly in Denver when we were going through those shotgun marriages. You had to be integrated and all of the growers all of a sudden had to meet retailers and the retailers had to meet growers out here in Colorado because the MED rule change. A bad partner is worse than a bad spouse because they’re going to run for the hills and try to extract as much money and as much concessions as possible. With a debt-based lender, it’s like dating where an equity-based lender is more like a marriage. If it’s not going to work out, I’d rather have a one-day blunder, then a marriage that drags on that, you’ve got to spend a lot of money in order to get an expensive divorce and move on with your life.
Scott, with that said, share a story with us, a bad one that you’re like, “I can’t believe this happened,” because they’re all over the board. In the newer markets, I want you to pay attention to this because what Scott’s going to share with you will definitely help you keep your eyes and ears open as you’re looking for business partners or equity partners. Scott, do you have one that you wouldn’t mind sharing?
It will remain nameless but I was dealing with two partners there. One owned the building and one had the expertise to grow. You figure, “That’s a good start here.” The one that owned the building was wealthier than the grower of course. The building owner thought he knew more than the grower with these new LED lights and he wanted to experiment with them. The old school growers should know they’re not ready for prime time yet. The grower went away for a holiday weekend and ended up getting locked out of the building that was growing and lost a crop because the new owners said, “I’ll bring my home grower in here. The hell with you.” There’s a lot of money and legal fees. I don’t know what ended up knowing what happened but it was not very pleasant. When he called me it was like, “I’m never going in with a partner again. It’s the worst idea I’ve ever had. I’m going to own my own stuff and that’s going to be it.”Don't run out of money. Don't get half way over the bridge and realize everything is going to cost at least twice as much as you think. Click To Tweet
With that said, you probably caught him at a bad time and it just happened. I’m pretty familiar with situations because I’ve seen several. Partners are good but if anybody out there is looking into partnerships, you have to vet your partners well to understand who they are, what they are and what they bring to the table. If you’re able to date ahead of time and not go all in with somebody and understand how they work, a lot of times you have a better relationship in few groups. That’s what I’ve seen anyway. I was wondering, you’ve got a lot of growth happening now and you’ve got legalization talk always happening. If you had a crystal ball and you were able to say, “When do I see legalization happening and what would push it over the mark and happening in Washington?” Can you give us a little insight on what you think and why?
We’re gradually moving there state by state and depending on how our economy reacts over the next 12 or 13 months and what actions Donald Trump is going to take in terms of trying to portray a healthy economy so that he presumably gets re-elected. What will happen is the States will have the choice of going legal or not. Most of them will choose to take the tax revenue and not have their neighbor state received the bulk of that. You’ll see late 2020 or certainly by 2021, 2022, things will be legal all over the place.
Some people would say, “You’re crazy. It’s not going to be legal for another 5 or 10 years.” What do you say to them?
Look at the tide, Illinois did it legislatively. States are going to say, “We can do it legislatively and raise all of this tax money. What are we waiting for? We haven’t seen the harm. We haven’t seen Colorado or Washington come unglued. Let’s go ahead and bring it on.” It creates jobs. It’s a dual win. It creates good-paying jobs and the real estate values go up. You bring in new tax revenue and hopefully, if not reduce greatly, at least reduce somewhat the black market for marijuana sales.
If you were in a new market and you were going to explore or starting a business in cannabis, what would be the number one thing you would tell the new business owner when he’s looking into financing or looking at partners?
Don’t run out of money. Don’t get half way over the bridge and realize everything is going to cost at least twice as much as you think, sometimes more and take at least twice as long. There is no shortcut. You’re in it for the long haul. You may get bought out sooner but you’re in it for the long haul and plan on that.
It’s not a get rich quick is what you’re saying.
Not at all. Not at this point in time.
If you look at the media, they tend to tell you different. Am I way off-base here?
The media likes to glamorize and sensationalize anything. That’s the only way they can possibly get your attention in all of the noise that proliferates as news here. If it’s not breaking headline and somebody’s getting shot from sending out some tweets that’s ill-advised, it doesn’t get your attention. You’ve got to do something to be spectacular and flamboyant. The early marijuana films that came out, the early reality play. The one with Breckinridge, I remember that one where they were only dealing in cash. That night they had a huge sales number, whatever it was. It was $50,000, $100,000 and they’re literally taking the twenties and throwing it up on a bed. It makes for a good TV but every dollar that landed on that bed had to go out to pay taxes because the ownership at the retail level pays 70%, 80% of the revenues out of taxes because they’re unable to deduct normal SGNA and other types of expenses because they’re dealing in a controlled substance.
That’s not talked about very often either. If anybody out there is exploring what business to get into in the cannabis side, be well aware of the tax implications before you jump in because it will definitely change the direction you’re steering the ship.
Many people had to sell their business when it came time to paying the tax man because they hadn’t allocated for the substantial reduction and deductible business expenses and therefore, the huge amount of taxes that are owed based on 280E.
We’ll get into some 280 debts so people understand what 280 is and how it works because it’s a very tricky one. I don’t want to go too far into it because it’s multiple shows when you start breaking it down. Scott, I wanted to thank you for joining us. If people want to talk to you about some more financing, how can they get in touch with you and where can they contact you at?
My email is SJordan@AltFinNet.com. That’s my email address and I would love to talk to any of you about financing needs. It’s become more and more available and open. We’re seeing more and more choices of financing available. Reach out to me on LinkedIn, Scott Jordan.
Scott, it was a pleasure having you here. I appreciate you taking time out and giving some people some solid knowledge that are starting their businesses and moving forward. Thank you so much.
Thank you so much and thanks for the good work that you’re doing, educating people out there. It’s a great thing to do and we’d love to help in any way that I can. Education enables people to become empowered and when you were empowered, you’ve got a strength instead of weakness. That’s what I want to be able to help people do.
We will talk to you at some time down the road.
Thank you. Take care. Bye.
- Alternative Finance Network
- Dynamic Alternative Finance
- Partner Colorado
- Dama Financial
- Scott Jordan on LinkedIn
About Scott Jordan
Scott Jordan is founder of the Alternative Finance Network, providing access to funding for cannabis companies. Since 2009 he has been a pioneer in providing loans and equipment leases for cannabis companies and has been called “ The Marijuana Money Man “ by Fox- San Francisco and the Denver Post .He created one of the first companies to provide access to debt based capital, Dynamic Alternative Finance in 2014 and arranged over $30 million in funding . He has taken his existing private capital sources and created an Alternative Funding Network for cannabis business owners seeking funding for equipment, working capital, real estate, accounts receivable, and project financing helping entrepreneurs expand their business and keep their remaining equity.
He has a keen sense of timing and has been at the forefront of 3 other business evolutions, having held key sales management positions in the telecommunications industry with long distance provider MCI, local exchange carrier ICG, and the first voice over the internet international wholesale carrier ITXC. Scott is a commercial finance expert known throughout the marijuana industry and has been interviewed by local TV and radio stations, authored articles and been a featured speaker at national conferences.