Bespoke Financial, which claims it is the first lender in the country providing debt financing to cannabis companies, today announced its strategic partnership with PayQwick, the cannabis industry’s most comprehensive treasury and financial services platform. The partnership provides a compliant one-stop shop for cannabis businesses to access Bespoke’s lending products and PayQwick’s invoicing, electronic bill pay, armored car cash pick-up, wire transfers and other financial services.
The lack of access to traditional financial services including deposit accounts and lines of credit have been major roadblocks in the early years of the cannabis industry. This partnership enables Bespoke’s clients to access preferred deposit fees in addition to free money transfers to mutual Bespoke and PayQwick customers via the PayQwick platform. In return, PayQwick clients receive priority access to qualify for lines of credit with Bespoke based on the underwriting and due diligence processes cannabis operators currently abide by. The platform is currently available to cannabis businesses operating in Arizona, California, Colorado, Florida, Illinois,, Massachusetts, Michigan, Oregon and Washington with more U.S. markets to come.
I caught up with Bespoke Financial co-founder and CEO George Mancheril to find out more.
Jackie Bryant: How did you get started in the cannabis industry?
George Mancheril: My initial interest in exploring cannabis came largely from my own personal opinion that the War on Drugs and cannabis prohibition has been a failed attempt with a high amount of human and societal costs with little to no benefit offered in exchange. The courageous momentum from voters in CO, WA, OR and CA presented a viable solution for a new framework that would undo some of the damage from decades of bad policy. The idea and motivation to start Bespoke Financial came from the convergence of 3 factors:
- Cannabis offers debt investors tremendous potential for above average risk adjusted returns. As a nascent growing industry with more states adopting recreational sales and an increasing number of new consumers gravitating to the legal market, cannabis has numerous supportive trends that both lower the credit risk in the industry while keeping the industry’s overall performance meaningfully less correlated to the broader CPG sector or changes to the interest rate environment of the broader economy. Additionally, the lack of broadly available debt financing to cannabis operators results in a significant liquidity premium by way of higher yields paid to first movers among investors.
- Cannabis operators have significant financing needs to capitalize on the opportunity in front of them. Historically, the majority of capital available to cannabis companies came strictly from the High-Net-Worth and VC investor bases through equity raises. While this funding was crucial for the beginning of the industry, equity capital is best suited for established operators and industries with less volatility and uncertainty in the future. Given the challenges involved in growing an industry and the need for additional financing as companies grow quickly highlighted the limitations of equity capital as the only avenue for financing. Not only would subsequent financing rounds dilute owners control in their own businesses, but the volatility of equity investor sentiment can result in companies finding a lack of new capital at crucial and challenging moments in their growth. Debt financing, particularly scalable debt financing as offered by Bespoke, offers companies a reliable source of funds which grows as the relationship between borrower and lender strengthens over time.
- There are numerous friction points in the existing financial framework which block the flow of capital from debt investors to the right operators. We’ll talk about those in a minute.
JB: Tell us more about Bespoke Financial and your product lending services.
GM: Bespoke provides revolving lines of credit for cannabis operators to access non-dilutive, scalable capital. Our lending products alleviate working capital constraints that have been so prevalent in this cash intensive industry since until recently little to no lenders were willing to work with these businesses.
We currently offer 5 financing solutions which allow our clients access to capital based on their specific needs and position in the supply chain:
- Line of Credit offers asset heavy borrowers the ability to access funds through an ABL
- Inventory Financing is great for manufacturers, distributors and any operator managing raw material costs and focused on maximum throughput
- PO Financing enables operators to increase their purchasing power to improve unit economics as they scale
- AR/Invoice Financing enables companies to increase sales by offering terms without sacrificing cash flow and additionally allows companies with slow paying clients to manage on-going expenses
- Dispensary Financing is catered for dispensaries which are often the most resource constrained part of the supply chain a fast and easy application process to access the financing needed to grow their business
JB: Why is financing so challenging for the cannabis industry to obtain?
GM: There are numerous friction points in the existing financial framework which block the flow of capital from debt investors to the right operators.
- Debt investor friction points:
- Federal illegality bars financial institutions (ie banks) and institutional capital (ie debt investors & alternative lenders) from servicing the space.
- Cannabis’ lack of access to banks has resulted in a large cash component to the flow of capital. The lack of electronic payments and easily auditable financial performance offers an additional layer of risk to potential investors.
- Since cannabis is a new industry with new companies, there is no historical credit performance data that investors can look to in order to underwrite risk in their traditional framework.
- Cannabis in the US is a highly fragmented industry across state lines. This adds complexity in both underwriting, as each state market must be evaluated as a self-contained economy distinct from other markets, and capital deployment as institutional capital has a limited number of options to deploy significant amounts of capital to borrowers. Unlike alcohol or tobacco where investors can underwrite a borrower active across the country and deploy $100mm in an individual deal, in cannabis investors undergo the same diligence and underwriting to deploy smaller amounts, reducing the effectiveness and lengthening the amount of time to deploy funds.
- Cannabis borrower friction points:
- The most important friction point here is the fact that the vast majority of cannabis companies still fall in the SMB bucket. These are companies without the dedicated resources and manpower to search for viable funding options and source the most attractive terms. As a result, most companies have operated under the assumption that their businesses must be entirely bootstrapped with their own resources, leaving a large amount of growth potential unrealized.
JB: You recently announced you partnered with PayQwick. How did this partnership come about? How does this fintech partnership service cannabis operators and banks?
GM: We have worked closely with PayQwick over the past 3 years as our businesses are very complimentary. PayQwick provides an online platform that offers deposit and payment capabilities to cannabis operators while Bespoke offers the financing these companies need to scale.. Bespoke requires our clients to have cannabis complaint banking prior to us lending them money due to obvious risk concerns on extending funds to businesses without a bank.
We recently strengthened this relationship with PayQwick by launching a fintech enabled partnership that aims to provide access to bank services and lending via our online platforms.
This helps cannabis businesses by providing a one-stop shop for all their financial services, the same as any traditional business would have available to them at a Chase Bank, Wells Fargo, etc.
JB: What distinguishes Bespoke from its competitors? Can you speak to any previous success stories?
GM: Bespoke was the first mover lending to the cannabis industry 4years ago. In 2018, both traditional and alternative lenders ascribed no value to the assets of a cannabis operator which we felt presented us with a huge opportunity. Our growth alongside the industry over the past 4 years has given us a unique understanding of the complexity and challenges faced by cannabis companies, giving us a huge competitive advantage in underwriting and managing credit risk. Additionally, our fantastic track record since inception and throughout various bouts of volatility allows us to access larger pools of capital with greater freedom to offer the most attractive financing terms to the industry. Also since 3 years of lending history we have a number of success stories as you can see from our client list being a who’s who of top cannabis brands. Our lending products have allowed these companies to scale and become profitable which has been elusive for most of the industry. For example, our client Jeeter has worked with us for almost 3 years now and gone from a relatively unknown pre-roll brand in 2018 to the top selling pre-roll brand in the US in 2021.
JB: You’ve only been in business since 2018, yet have already generated $150M in funding. What has led to your success?
GM: I’d say there are 2 main drivers that have led to our success in terms of fundraising. First, our team has developed the most informed underwriting model in the cannabis industry which has allowed us to partner with the strongest operators who have performed extremely well compared to the industry as a whole. Secondly, traditional debt providers are eager to put their capital to work in the cannabis industry so Bespoke has been an obvious place for investors to gain exposure to the industry in a proven and lower risk way.
JB: Tell me about FinTech in cannabis. How are these ancillary services supporting the industry? Where do you see the future?
GM: Cannabis and technology have a very interesting relationship where this is really the first new industry being built in the modern technological age. So we are seeing creative solutions to operators’ challenges built in real time. In terms of fintech, most of the developments to date have been focused on the consumer payment side as a huge pain point has been that retailers can only accept cash payments or a variety of debt card work around solutions.
At Bespoke, we are excited to be one of the only businesses focusing on creating fintech solutions that service B2B transactions. Our lending products allow cannabis operators to pay their vendors to bring in raw materials without coming out of pocket. Now we have integrated our lending platform with metrc (state compliance software) that allows our clients to choose to finance a PO at the push of a button!
JB: Debt financing is becoming increasingly popular in the cannabis industry. Curaleaf was the largest U.S. MSO to raise $425M from an 8% debt financing back in December 2021. What does this say about the current state of lending in the cannabis industry?
GM: I think this a strong sign that cannabis businesses are now able to access debt financing in ways that all other industries do. Many of the executives at these MSOs come from traditional businesses and expect these lending tools so our thesis has always been more when debt financing will be widely used vs. if it will. Bespoke is excited to provide access to non-dilutive capital for all size operators as we aim to empower all entrepreneurs to scale their business without losing ownership, whereas currently only the largest and publicly listed operators have the resources and market presence to obtain debt financing.
JB: The cannabis industry is constantly evolving, as seen in the recent announcement of New Jersey becoming adult-use just this last week. How do you see the east coast markets rivaling the west coast?
GM: East Coast markets such as New Jersey and New York are obviously huge opportunities and very exciting but I think the main thing to keep in mind is the time it takes to turn these new programs on. New Jersey for example has been working to approve recreational cannabis for almost 5 years and the first rec businesses are just now turning on. New York just approved the first 52 cultivation licensees this week which is awesome news as I’m a native New Yorker; the key message here is patience as we await these markets to develop. Bespoke closely monitors the regulatory developments in these new states as each state has very unique supply chain structures that can make a certain market more or less conducive for our lending products (ie. If a state is a limited license, vertically integrated state then there are very little B2B transactions)
JB: What are your thoughts on federal legalization? Do you think there is a possibility of this occurring? How will it shift your business model as institutional capital will become more readily available to cannabis operators?
GM: We have always looked at federal legalization as an inevitable so again it was a question of ‘when’ rather than ‘if’. I’d anticipate federal legalization happening anywhere in the next 2-5 years with 2024 being the next viable point in the political cycle to gather momentum for federal legalization but again similar to the individual states, the actual rollout of federal regulations will not happen overnight. The fact that Bespoke already has 3 years of lending experience and knowledge on this industry positions us very well for when other institutional investors begin to dip their toes into cannabis over the upcoming years. Bespoke has been a trailblazer in this space and we are excited for the continued normalization of our industry.