The Pot Shop Problem: Why Don’t Lenders Like Me?

Small Business, Small Business Loans
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Adult-themed businesses have a tough time finding loans

Your company’s finances are strong and its market position is solid. So lenders should be falling over themselves to offer you a small-business loan, right?

That depends on what you’re selling. Just ask Keith Miller, owner of Helix Studios, a gay porn site.

“There’s nothing illegal about our content,” Miller says. “We have steady revenue and profits. But banks and some of the lenders don’t understand our industry. They see the outside and go, ‘Ah, I don’t want to get involved with that.’”

If you’re in the adult entertainment business or another controversial industry, the hunt for capital takes persistence and creativity. As you’ll see, though, this problem isn’t insurmountable.

Some business owners encounter stigma

Some companies find themselves facing stigma they believe is outsized or misdirected.

When James Wang and Liz Klinger launched their vibrator, the Lioness, one nascent investor told Wang that everything was all set — but a higher-up refused to allow the deal to go through “because they didn’t want their brand associated with the topic.”

One business executive told them he found their product to be “morally wrong.”

Ijaz Khan, president of Stratus Stores, says the backlash against tobacco and smoking has made it tougher for him to find financing, even though he sells vape products. There’s a stigma against the tobacco alternative, he says. “That’s really unfair.”

Some products have legal issues

If your small business deals in products or activities that are illegal in some states, financing can be a huge challenge.

JoAnn Hammans, owner of the Humboldt County Collective, a medical marijuana dispensary in Northern California, says she can’t even open a checking account: “When I took over this business four years ago, I called every bank and credit union in this town,” she says. “And they all told me, ‘No.’ ”

Hammans and other marijuana dispensary owners are also out of the running for the country’s most popular form of small-business financing: SBA loans.

“The problem with marijuana dispensaries is they fall under ‘businesses engaged in any illegal activity,’” Small Business Administration spokeswoman Marlow Schindler says. “The definition we use for legality is that a business has to be legal at the federal level, not just the state level.”

But the SBA doesn’t stop there. The government entity devotes an entire webpage to ineligible businesses, including those that get a big chunk of their revenue from “legal gambling activities” or “present live performances of an indecent sexual nature.”

What business owners can do

Faced with stigma, as well as the stricter requirements of traditional lending, adult entertainment entrepreneurs, medical pot purveyors and other business owners often run into financing hurdles.

But online lenders, angel investors and crowdfunding may help.

This expansion of financing options for small businesses has been a boon for entrepreneurs like Khan. He found financing for his vape products business through Dealstruck, one of a growing number of online lenders with less stringent requirements.

Some online lenders don’t offer financing to adult entertainment or marijuana-related small businesses. But others embrace a broader definition of entrepreneurship.

“Our customers represent the best of the American Dream, and we are pleased to be a part of the journey for each of them,” Dealstruck CEO Ethan Senturia says. “As long as the businesses are legal and operate ethically, Dealstruck passes no judgment.”

There’s also venture capital investments and crowdfunding. Wang and Klinger have been able to raise more than $600,000 through these avenues.

You can compare different lending options on the NerdWallet small-business blog.

Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: bpimentel@nerdwallet.com. Twitter: @benpimentel.

To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.