By Alex Nitkin, Illinois Answers Project
On a recent morning, a gentle hum filled the cannabis packing room at Helios Labs’ manufacturing facility in Broadview. Hundreds of pounds of marijuana was being prepared for sale.
About two dozen technicians pre-rolled joints at their workstations and applied labels to boxes. In the next room, two workers were measuring out THC oil for drip-dripping into vape cartridges. The workers faced a corner that was empty, where Ambrose Jackson (co-founder) and Alex Al Sabah (co-founder) soon hope to infuse products like honey and sriracha with cannabis.
Al-Sabah said that Helios parent company The 1937 Group is trying to differentiate itself from other companies. There are many products out there but most of them are the same.
Helios Labs, one of Illinois’ 87 “craft grow” companies, is aimed at independent pot cultivators, who like Jackson have been victimized by the state’s criminalization of marijuana for decades. Jackson claims that he was arrested as a teenager on charges of possession with intent to sale. He is now the Chairman and CEO of The 1937 Group – a cannabis company with several social equity licensing.
As of mid-October, only Helios Labs was actually in business. This is more than four years after the state legislators legalized recreational marijuana sales. They called it “the most equity centric law” in the country.
This is due to a number of obstacles in raising funds: banks are still prohibited by federal law from lending and many social equity operators experience widespread discrimination within the finance industry. Jackson and other operators attribute the difficulty of raising funds to a controversial cap by states on canopy growth.
Helios’ success is partly due to a government-backed loan program designed to assist minority-owned companies.
According to the Illinois Department of Commerce and Economic Opportunity, the company has received $1.3 million this year from the Cannabis Business Development Fund. The fund has provided about $21 millions of the $34 Million in seed funding that it promised since 2021.
The regulators are preparing to inject another $40 million in the program. They say they have learned how to leverage this fund to provide a quick and easy burst cash to social equity licensees.
Small cultivators are struggling to find a way forward, as they will be excluded from the next round of funding.
Jackson and other participants say that the money helped, but more is needed. They also want to see some regulatory relief.
Why is it so difficult to open a cannabis grow site in Illinois?
Nearly 90 applicants received craft grow licenses by mid-2021 to open small, independent cultivation spaces. Many licensees had difficulty raising capital.
Bobby Burns of Herban Gardens said that he regretted applying for an art grow license rather than a license to operate a dispensary.
Burns, an Evanston alderman who is a former political consultant and now dispensesary owner, said: “Dispensaries just seem to be so much easier. “They’re also easier to fund because they can generate revenue from day one. “You just need to put the product on your shelves and you’re good to go.”
Burns, along with other cannabis entrepreneurs who spoke to Illinois Answers, said that opening a marijuana dispensary can cost anywhere between $1 million and $ 2 million. A grow operation can cost between $5 million and $10 million.
Pot growers face a further challenge: the traditional way to start a business, which is asking a bank for money, does not work for them. Banks are prohibited from dealing with the cannabis industry because it is illegal to sell cannabis under federal law.
Borrowers may find creative ways to borrow money, but the loans are often complicated and have high interest rates, according to Horacio Mendez of Woodstock Institute in Chicago, an advocacy group for fair lending practices.
Mendez explained that trying to get around all of these laws was like working for the mafia. The lending industry is forced to get creative because of the cannabis business, which is new. “And that’s something they’re not good at.”
Even if they were legal, Akele Parnell said, many social equity applicants do not have the same financial and political connections as their white counterparts. Her 11th Level craft-grow facility received operational approval last month to begin growing marijuana in Rolling Meadows.
Parnell explained that a state law cannot easily overcome the widespread discrimination within the financial sector. According to data published by the U.S. Federal Reserve in 2017, Black-owned companies are twice as likely as white-owned ones to be denied a loan.
He said, “It is not as if all of these Black and Brown business owners get loans for their federally-legal businesses to begin with.”
Helios Labs and other businesses who are creative in raising funds will have to overcome one last obstacle: a 5,000-square foot cap on growing space.
The Illinois Department of Agriculture released new guidelines earlier this month on how growers could apply for permission to expand their operations beyond 5,000 square foot, according to Scott Redman of the Illinois Independent Craft Growers Association.
He said that instead of listing specific benchmarks the language leaves many criteria to regulators discretion. This includes “the market’s need for more cannabis production” as well as “the ability of craft growers to cultivate additional marijuana.”
Jackson explained that the cap on canopy area has created a situation where craft growers are unable to get started. We can’t build our facility because we are raising money based on a [revenue] estimate that includes 5,000 square foot.
The measure that would have increased the canopy area to 14,000 square foot failed in early this year after a trade association representing corporate pot companies raised objections about a synthetic substance not addressed by the bill.
Parnell, Burns, and Jackson are all in agreement that changing this regulation would allow growers to raise more money.
Helios’ “bloom” room is a tangible reminder of this challenge. The room is 40,000 sq. ft. of empty space. Jackson’s voice echoes from wall-to-wall.
Jackson stated that they had to raise a half-million dollars upfront to build this space, before they could deliver a single dollar of product. We’re paying rent for all this space. We still don’t get to use 80 percent.
Launching the Cannabis Business Development Fund
In 2019, lawmakers envisioned a revolving fund that would be overseen by state regulators to help prevent an industry dominated by national companies with a lot of clout. The Cannabis Business Development Fund began with license fees paid by owners of medicinal dispensaries who wanted to switch to recreational sales when they became legal.
The law did not provide any details about how the fund would work or how money would be delivered to those in need.
According to records, in late 2021 the Illinois Department of Commerce and Economic Opportunity granted loans to 32 social-equity licensees. These included 10 craft growers and 11 licensed infusers, and 11 transporters. The Illinois Department of Commerce and Economic Opportunity spokeswoman Emily Bolton said that dispensary owners weren’t eligible for loans as their licenses had been tied up in litigation.
To facilitate the loan, the state hired two third-party finance firms: Good Tree Capital and Credit Union 1.
Redman of the Craft Growers’ Trade Association said that the process was hampered almost immediately by the rigid criteria set forth by the firms.
Redman explained that the problem was Good Tree Capital and Credit Union 1 wrote these loans like they were a separate commercial loan from another business. They pulled credit reports for these people, and many had bad credit.
Burns and his partners, who had a track record of business, were told six times to modify their loan application.
Seke Ballard is the founder and CEO at Good Tree Capital. He said that his company carefully reviewed each applicant’s finances and business plan in order to make sure they would “pay back the loan and taxpayers won’t lose any money.”
Ballard explained, “I understand that this might be a little overwhelming for them.” But here’s the harsh reality: This is what they will be dealing with from any lender.
Bolton acknowledged that there were bumps on the road.
She wrote that “our highest priority was to create and implement a program which could provide capital as quickly as possible while meeting the fiduciary standard required for use state funds.” As with any new program, DCEO has learned many important lessons. We also understand that this was the first time for some licensees to be exposed to the criteria needed to execute a loan funded by the state. The social equity licensees’ feedback has helped us improve the program.
State changes course
In November 2022, the Illinois Department of Commerce and Economic Opportunity officials acknowledged that the program was not working.
The government decided to eliminate the third-party lenders and announced a brand new strategy. The state would underwrite all remaining capital and the loans were fully forgiven, which means they became grants, if recipients could prove the money was used properly.
Those who wanted to grow plants rejoiced. Burns’ Herban Garden, which had been in operation for more than a decade, received $5000 from the state back in March. Another $750,000 was given over the summer. If everything goes according to the plan, he will not have to repay the money.
Burns said, “It was gorgeous.” Before, we could only raise money by promising a loan. We now had a basis to build on.”
Burns and his business partners are still fundraising. Herban Garden still needs to raise $5 million more from equity investors in order to start growing cannabis flowers at the facility in Joliet they are eyeing.
Parnell’s 11th Level, which received $1.25m in two tranches this year from the state, said that the amount was “not near enough” to help his group reach the finish line of fundraising. It was a huge step forward for both their business plan and the nine other growers.
Parnell stated that “most craft growers will not be able get business loans from the private sector unless they are already wealthy and have a history of running businesses.” Even a low interest loan [from state] is an important thing. A forgivable debt is incredible.
What to do next
Not everyone was happy with the decision to switch from a traditional loan to one that is forgiven.
Ballard of Good Tree Capital acknowledged that this switch is in the interest of the borrowers trying to build their business, at least for the short-term.
He said that making the loans forgiven would be against the long-term state vision of creating a revolving fund to support minority-owned business in perpetuity.
Ballard’s multistate company helps operators from disadvantaged backgrounds break into the cannabis business. It feels great right now, yet businesses will always need capital. Where will they be in a year, three years, or five years?
The Illinois legislature approved an additional $40,000,000 for the Cannabis Business Development Fund earlier this year by transferring money from a pot that was designated to medicinal users. Legislators provided few guidelines for how to spend the money.
Bolton said that officials are preparing to offer a second round of loans, but only for social equity dispensaries which were not funded in the initial round.
Craft growers are unhappy that they were left out of a second round of forgiven loans. According to state data, out of the 90 licenses for craft grows, only 13 applicants applied in the first round. Of those, 10 were chosen. Redman says there is still a great need for craft growers.
Redman stated that “as far as the growers are concern, we don’t see why [loans for growers and dispensaries] couldn’t be done simultaneously.” There should be no reason that they cannot have X dollars to one and Y dollar for the other.
Bolton refused to give a timetable for when applicants will be invited, but confirmed that the second round would consist of “direct forgiven loans fully funded by the state” and wouldn’t pass through any third parties. The department does ask for proposals on “technical support.”
Ameya pawar, co-owner of social equity licenses of three cannabis dispensaries said that he was encouraged by state’s decision of stepping directly into the lender role instead of turning third parties.
Pawar, a former Chicago alderman, is an outspoken supporter of public banking. He said that the state should use its ability to define creditworthiness more broadly than private lending institutions, in order to open up more opportunities for borrowers.
Pawar explained that the return on a public loan is not just repayment of the debt. “The return for a public lender is not just the repayment of the loan,” Pawar said. You’re creating jobs. “You’re increasing income taxes and sales tax.”
He added, “It allows us to see beyond the traditional pro-forma.”
He said that the most likely path for success of the fund is to return low-interest nonforgivable loan and have the state remain the only underwriter.
Mendez, of the Woodstock Institute, agreed. He said the state’s lending program was a good first step until there is a federally-legal business model for funding the industry.
He said, “The biggest challenge will be where the state gets the money it lends.”
Jackson and Al-Sabah, of Helios Labs, aren’t going to wait around for the answer. They opened a dispensary near the Indiana border in Tilton last month with the intention of using sales to seed their Broadview grow operation.
The plan has already encountered a problem.
Jackson explained, “We just closed a capital raising that would have enabled us to grow while we ramped up the dispensary’s business.” “However that investor could be in default right now.
We’re still trying it out.
The article originally appeared on Illinois Answers Project. It is republished under a Creative Commons License.
Photo by Chris Wallis // Side Pocket Images.
The post Illinois Craft Cannabis Growers Struggle to Find Financial Footing in the Face of Millions in State Aid first appeared on Marijuana Moment.
