For this week’s Power Player interview we spoke to Elizabeth Morris, COO of Dynamic Alternative Finance, which has facilitated about $100M in loans to cannabis businesses.
In a wide ranging conversation she discussed tourism’s impact on the industry, the perils of finding lenders and who’s thriving in the pandemic.
This interview has been edited for length and clarity.
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WeedWeek:Tell us about your business.
Elizabeth Morris: Dynamic Alternative Finance was founded when REC passed in Colorado, a little over six years ago. We’ve been financing businesses in cannabis and hemp since then. We work in equipment financing, real estate, working capital, bridge loans and construction loans.
We are not direct lenders. We have lending partners:Family offices, hedge funds, and other private money sources. We’ve vetted them and know they’re legit and actually going to be real lenders for our clients. We work primarily in the U.S. but we’ve done some pretty significant work in Canada as well.
WW: How does one go about getting a loan from you? What are the criteria?
EM:The criteria vary depending on what a client’s looking for. When we initially speak to a client, we try to figure out exactly what it is they’re looking for and then what the use of funds is going to be. Then we look at the company. Is is a start-up or has it been in business for a while? If it has been in business, what are their revenues? Then we find out about what they need the funds for and we determine the best path for them. We don’t have a one size fits all, upfront application. We try to keep it really easy and straightforward for the client. Our offerings are highly variable.
WW: Who are most of your clients?
EM: We have a lot of plant touching companies. We have a lot of dispensaries, manufacturers, grow operations. We do get ancillary companies as well. Depending on the nature of the business, sometimes ancillary companies are able to get traditional financing. It’s rare, but it does happen occasionally. It runs the whole gamut, anybody along the whole supply chain.
WW: Is this a business model that existed in other industries or is there no need, because other industries are legal?
EM: It is a business model that exists in other industries. DAF was originally founded out of a traditional equipment leasing company. There’s always a need for it because people don’t necessarily know where to go to find financing for specific parts of their business.
But it’s much more needed in an industry that’s not federally legal. If you have just a traditional commercial business, you can get an SBA loan, for example, or you can get traditional financing and go directly to a bank. The need isn’t there as much as it is for this industry, but it does exist.
WW: What are your fees, roughly?
EM: Again, highly variable depending on the nature of the loan that somebody is going to go for. The most expensive from a fee standpoint is our small business start-up program. The client pays 9.9% of the amount funded on the back end. There’s no upfront fees, but they will get charged 9.9% of whatever amount they get funded, after they’re funded.
That particular program is for startups and for smaller organizations that don’t have the revenue or the assets to support another type of loan. From a percentage standpoint, that’s the most expensive. In our real estate and our equipment financing transactions, the fees are generally in the 2% to 3% range.
WW: Are companies typically giving over equity as collateral?
EM: We work about 99% of the time specifically in debt financing because people obviously don’t want to give up equity in their company.
WW: Are you dealing with a lot of distressed assets?
EM: Not a lot of distressed. The investment partners that we work with, they’re very excited about the industry and they want to invest in the industry. They underwrite and review deals in the same way that a traditional commercial underwriter would review a deal.
As far as being distressed, it’s not necessarily a target group of people that we would look at. An exception to that might be we get some larger organizations (MSOs) who are looking for assets they can purchase from other companies that aren’t in a great position right now. Sometimes we do put deals of that nature together, but it’s more the exception than the rule.
WW: What else do you offer clients?
EM: We’ve been working in this industry, from a financing standpoint, basically longer than anybody else has. We have vetted all of our lending partners and we know that they are real and we know that they’re not out there to do the wrong thing by our clients. They’re actually real, true funding sources. One thing that we do see, unfortunately, is someone will call us and say they thought they had a deal. It was a really good fit. They had a great term sheet and wonderful rates and the lender charged them $25,000 on the front end to do underwriting and then decided not to do that deal.
EM: Unfortunately, there’s people out there who are doing that. They don’t necessarily intend to invest in the business, but they’re presenting themselves as lenders and then charging the big upfront fees. By working with us, you have some protection against that because, again, we’ve got long standing relationships with our lending partners and so we’re not going to let that happen to a client.
WW: How has the pandemic changed your business?
EM: People are still lending. It’s been interesting because, as you probably know, it’s been deemed an essential business in many states. That’s a positive for us overall. We have seen a big uptick in our small business lending program because cannabis businesses are not eligible for SBA loans. There’s definitely been people who need some extra cashflow.
The small business program has been really busy. As far as our larger programs, equipment finance and real estate, people are still lending in those areas but it’s taking a little bit longer. The underwriting is a little bit more strenuous because the investors have seen wild fluctuations in the market and in their own liquidity. They’re just a little bit more cautious. I think it’s just natural that people are feeling nervous with lots of unknowns out there in the world right now.
EM: The deals are still getting done. I think people are encouraged by the fact that it has been deemed an essential business. But the bigger deals are just taking a little bit more time.
WW: You see a lot about the industry that isn’t necessarily available to other close observers. What can you tell us about the market?
EM: I don’t think cannabis is as recession proof as some people initially thought it was going to be. The basis for me saying that, and I am an optimist by nature, is it’s become clear that in certain states, like Colorado and Nevada, the industry has a high dependency on tourism. What’s not well known is that 25% of cannabis revenue in Colorado is based on out of state visitors.
EM: Yeah. I think that the industry there will need to make adjustments.
WW: In Nevada, it’s got to be 60% or more.
EM: In Nevada there weren’t a lot of delivery services initially. Now they’re trying to get some delivery services up and running. California had a pretty decent delivery model already in place. The interesting part is going to be how much tourism opens up in a lot of places because that’s going to definitely impact it. Places who can get delivery online and people that have been able to really fine tune their curbside presence are the ones who are going to really be the survivors.
EM: We have a client we’re working with in the northern San Francisco area. Just recently, they had been licensed but were getting up and running. They got the delivery service up in the past few weeks. It has just been amazing, the business they’ve been doing. It’s way, way, way surpassed their projections.
WW: What can you tell us about the hemp industry from your lending?
EM: The Farm Bill [legalizing hemp] passed about a year and a half ago now. Interestingly enough, even though hemp is fully legal at the federal level, the lending for hemp is still not like any other industry. That’s why we’re still working with hemp and CBD companies quite a bit because, again, even though the Farm Bill did pass, banks are just very slow to get into that and to get involved. It’s just continued to be a challenge for anyone in that industry to get traditional financing. They’re still looking for alternative sources.