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Impact of Covid-19 on the Cannabis Loan Industry
Published by Robert Kerr
Due to the majority of eQcho Capital’s team coming from banking, we realize that we cannot quit during this time, as cannabis and hemp companies need financing more than ever. Our focus is exclusively cannabis, hemp and CBD; eQcho Capital is determined to be the number one small business lender for the industry.
For more information, send an email to info@eqcho.com
The Coronavirus has changed almost all aspects of everyday life.
From the closure of public schools which had over 50 million children in attendance, to the smaller things such as public parks and hiking trails. Among the uncertainty, we do know one thing; the Coronavirus is not biased — it affects everything. The easiest way to observe this effect is through the GDP, because GDP encapsulates everything; every item sold, every service, every widget produced. Goldman Sachs is estimating the US GDP to fall 39% in the second quarter, on top of the 4.8% decrease in the first quarter. I’m sure this is not news to you, but it’s worth reiterating just how badly the Coronavirus has affected our lives. There is one thing though, that is touched on less it seems, and that is the lending environment, i.e. the environment in which credit is extended to businesses.
Yes, you’ve likely heard of the PPP program, or what the Fed is doing to ease liquidity issues within the financial markets. But beyond that, it seems not much has been said in the way of how hard it is to get a loan, or how much the terms on those loans have been affected. On the surface, it’s difficult to get a loan because of the number of requests being made; businesses are seeking loans at a pace that the US has never seen. Combine more requests with the same number of staff at the institutions giving the loans, and you’re going to see a slowdown. Below the surface however, we’re seeing not only a slowdown, but also a restriction on the terms and structures of loans.
How does a financial institution determine whether or not a business gets a loan? Well, it’ll look at a few things, but the main focus will be on let’s say three things:
Looking at past financials is probably the easiest part in evaluating a business, since it’s pretty black and white. Moving on to the industry that the business operates in brings about a bit more due diligence. You have to question:
The most difficult thing, however, is evaluating the projected performance, because that is the unknown. It was less of an unknown when the economy was humming along, with its lowest unemployment rate in 50+ years, and modest GDP growth. But now, in the wake of the Coronavirus, the future is much more uncertain. Although Goldman Sachs is predicting that 39% drop in GDP, that’s just an estimation with some confidence interval around it. What they should have said is “We are [insert confidence interval here]% certain that the US’s GDP will fall by 39% in Q2.” They don’t really know. So, with the future more unknown than ever, financial institutions are much more reluctant to lend, let alone to cannabis companies of which already operate in an industry that is federally illegal. Pairing the Coronavirus’ uncertainty and the legality around cannabis, and you have an equation which results in stricter lending standards and more declines. Point being, if you’re able to secure a loan, take it with a warm heart.