As independent craft growers in Illinois struggle to secure financing for their cannabis businesses, a state-backed loan fund has emerged as a key lifeline.
A gentle hum of movement filled a cannabis packing room on a recent Friday morning as hundreds of pounds of marijuana were prepared for market at Helios Labs manufacturing warehouse in west suburban Broadview.
Nearly two-dozen technicians sat at their stations, pre-rolling joints and slapping labels onto boxes. The next room over, a pair of workers measured out THC oil to drip into vape cartridges. They faced an empty corner where co-founders Ambrose Jackson and Alex Al-Sabah soon hope to infuse honey and sriracha products with cannabis.
“We’re trying to focus on things that differentiate us from the rest of the pack,” said Al-Sabah, chief strategy officer of Helios’ parent company, The 1937 Group. “There’s a lot of product out there, but a lot of it is the same.”
Helios Labs is one of 87 companies in Illinois with a “craft grow” license, which is targeted toward independent pot cultivators who, like Jackson, have suffered from the state’s decades-long criminalization of the drug. As a teenager, Jackson said he was arrested on charges of cannabis possession with intent to sell. Now, he’s the chairman and CEO of The 1937 Group, a cannabis company that holds several social equity licenses.
More than four years after state lawmakers legalized recreational pot sales in what they held up as “the most equity-centric law in the nation,” only Helios Labs and nine other craft growers were actually operating as of mid-October.
That’s due to a combination of fundraising obstacles: Banks are still federally prohibited from lending, and many social equity operators face endemic discrimination by the finance industry. The job is made even harder by a controversial state cap on growing canopy space that Jackson and other operators blame for repelling investors.
Helios owes part of its success to a state-backed loan fund designed to help minority-owned businesses.
This year, the company received nearly $1.3 million from the state-backed loan – the Cannabis Business Development Fund – which has delivered about $21 million of the $34 million in seed funding it had promised since 2021, according to data provided by the Illinois Department of Commerce and Economic Opportunity.
As regulators prepare to inject an additional $40 million into the program, they say they’ve learned how to leverage the fund into a fast and simple burst of cash for social equity licensees.
But with growers set to be left out of the next funding round, small cultivators say they’re struggling to see a path forward.
Advocates and participants in the program like Jackson say the state-backed loan helped, but it will take far more money — plus some key regulatory relief — before minority-owned craft grow operations start cropping up en masse.
Why Is It So Hard To Open A Cannabis Grow Site In Illinois?
In mid-2021, nearly 90 applicants were awarded craft grow licenses to start opening small, independent cultivation spaces. Many licensees faced challenges raising capital.
Bobby Burns, founder of Herban Gardens, said he came to regret applying for a craft grow license instead of a license for a dispensary.
“Dispensaries are just so much easier to stand up,” said Burns, a political consultant who became an Evanston alderman in 2021. “And they’re easier to get funding for because they can start making revenue on day one. You just need to get product on your shelves, and you’re ready to roll.”
Burns and multiple other cannabis business owners told Illinois Answers that it can cost between $1 million and $2 million to open a pot dispensary in Illinois. A grow operation, however, can cost at least $5 million and up to $10 million.
Helios co-founders Ambrose Jackson, left, and Alex Al-Sabah say the state’s 5,000-square-foot cap on canopy space has made it hard to attract investors. “We had to raise half-a-million dollars up front to build out this space before we could deliver even one dollar of product,” Jackson said. “We’re paying rent on all of this space. And we still can’t use 80% of it.”
Compounding the challenge is that the typical path to starting a new business — asking a bank for a loan — is not an option for pot growers. Selling cannabis remains illegal under federal law, meaning banks are unable to touch the industry.
Borrowers can seek some creative workarounds that allow them to raise money through loans, but they’re almost always complicated and come with pricey interest costs, said Horacio Mendez, director of the nonprofit Woodstock Institute, a Chicago-based advocacy organization for fair lending practices.
“Trying to work your way around all these laws is almost like being an accountant for the mafia,” Mendez said. “That, plus the fact that cannabis is a brand-new [legal business], creates a situation where you’re asking the lending industry to be creative. And that’s not something they’re good at.”
Even if it were legal, many social equity applicants lack the financial and political connections that many of their white counterparts have, said Akele Parnell, whose 11th Level craft grow facility got operational approval to start growing pot in Rolling Meadows last month.
Endemic discrimination in the financial industry can’t easily be overcome by a state law, Parnell said. Data published in 2017 by the U.S. Federal Reserve indicates that Black-owned businesses are more than twice as likely to be denied loans as are white-owned firms.
“It’s not like all these Black and brown business owners are getting loans to begin with for their businesses that are federally legal,” he said.
For those businesses that are able to creatively raise funds, like Helios Labs, there’s one final obstacle in Illinois to overcome: An initial 5,000-square-foot cap on the space for growing cannabis.
Earlier this month, the Illinois Department of Agriculture shared new guidance on how growers can apply for permission to grow past 5,000 square feet, said , said Scott Redman, founder of the Illinois Independent Craft Growers Association.
But instead of listing specific benchmarks, he said, the language leaves many criteria up to regulators’ discretion, including “the market need for additional cannabis production” and “the craft grower’s ability to cultivate additional cannabis.”
“The cap on canopy space has effectively created a scenario where no craft growers can get off the ground,” Jackson said. “Because we’re raising on a [revenue] valuation that takes 5,000 square feet into account, we can’t raise the money we need to build our facility.”
A measure to increase allowed canopy space to 14,000 square feet failed earlier this year when a trade group representing corporate pot firms raised objections over a synthetic cannabis substance that wasn’t addressed in the bill.
Parnell, Burns and Jackson all agree that if lawmakers could change this regulation, it would unleash growers’ fundraising potential.
Helios’ “bloom room” is a physical reminder of this challenge. The room is 40,000 square feet of empty space — nothing inside but Jackson’s voice, echoing from wall to wall.
“We had to raise half-a-million dollars up front to build out this space before we could deliver even one dollar of product,” Jackson said. “We’re paying rent on all of this space. And we still can’t use 80% of it.”
Launching The State-Backed Loan
Lawmakers in 2019 envisioned a revolving state-backed loan fund, overseen by state regulators, that would help prevent the industry from becoming dominated by clout-heavy national firms. The Cannabis Business Development Fund was seeded by license fees paid by medicinal dispensary owners who sought to pivot to recreational sales once they became legal.
But the law included few details on how the loan fund would operate — or how it would ensure money got into the hands of those who needed it.
In late 2021, the Illinois Department of Commerce and Economic Opportunity awarded loans to 32 social equity licensees: 10 craft growers, 11 licensed infusers and 11 transporters, according to state records. Dispensary owners were not considered for the loans because their licenses were tied up in litigation, said Emily Bolton, a spokeswoman for the Illinois Department of Commerce and Economic Opportunity.
The state recruited two third-party financing firms, Good Tree Capital and Credit Union 1, to facilitate the state-backed loan.
The process ran into roadblocks almost immediately as the firms set rigid criteria for approval, said Redman, of the craft growers’ trade association.
“The problem was that Good Tree Capital and Credit Union 1 just wrote these loans as if they were just a standalone commercial loan from any other business,” Redman said. “They pulled in credit reports on these folks, many of whom had terrible credit.”
Even Burns, who went into the application process with a business track record, said he and his partners were told to amend their loan application six times.
Seke Ballard, founder and CEO of Good Tree Capital, said his company vetted each loan applicant’s financials and business plan to ensure they “pay the loan back and the taxpayers don’t lose money.”
“I can understand how that might be a bit overwhelming for them,” Ballard said. “But here’s a harsh reality: That is going to be the standard they face with any lender.”
Bolton acknowledged the bumps in the road.
“Our highest priority was to develop and execute a program that could provide capital as expediently as possible, while meeting the fiduciary standards required for use of state funds,” she wrote in an email. “As with any first-of-its kind program, DCEO learned a lot of important lessons along the way, and we understand that for many licensees, this was their first encounter with the criteria required to execute a state-funded loan. We are grateful to the social equity licensees whose feedback helped inform program improvements.”
State Changes Course
By November 2022, officials in the Illinois Department of Commerce and Economic Opportunity acknowledged that the program wasn’t working.
They decided to cut out the third-party lending agencies and announced a new strategy – a state-backed loan: the state would directly underwrite the remaining capital, and the loans would be fully forgivable, meaning they would become grants if the recipients could demonstrate the money was being put to proper use.
Would-be growers rejoiced. After more than a year, Burns’ Herban Garden received $500,000 from the state in March and another $750,000 over the summer. If all goes according to plan, he won’t have to pay the money back.
“It was beautiful,” Burns said. “Before, when we were trying to raise money, all we had was the promise of a loan. Now we had something to work with.”
Burns and his partners still aren’t done fundraising. The $1.25 million infusion was a significant boost, but Herban Garden needs to raise more than $5 million from equity investors before they can start growing cannabis flower at a facility they’re eyeing in Joliet.
Parnell, whose 11th Level also received $1.25 million in two tranches from the state this year, said the sum was “not nearly enough” to get his group to the fundraising finish line. But it was a big leap forward for their business plan, and for the other nine growers who benefitted.
“Most craft growers, unless they were already independently wealthy or had a long history of operating businesses, are not going to be able to get business loans in the private sector,” Parnell said. “So even a low-interest loan [a state-backed loan] is a really big deal. But a forgivable loan is amazing.”
Where To Go From Here
The decision to switch to a forgivable loan model wasn’t popular with everyone.
Ballard, of Good Tree Capital, acknowledged that the switch was in the best interest of borrowers who are trying to stand up their businesses — in the short term, at least.
But he said making the state-backed loan forgivable cuts against the state’s long-term vision of building up a revolving loan fund that will be able to sustain minority-owned businesses in perpetuity.
“It’s kind of a sugar rush,” said Ballard, whose multistate firm helps disadvantaged operators break into the cannabis industry. “It feels good right now, but businesses are never going to stop needing capital. So a year from now, three years from now, five years from now — where are they going to go?”
Earlier this year, the Illinois legislature voted to infuse an additional $40 million into the Cannabis Business Development Fund by pulling from a separate pot designated for medicinal users. Legislators offered few guidelines on how the money should be spent.
Bolton said officials are preparing a new wave of loans that will only be available to social equity dispensaries, which weren’t funded in the first round.
Craft growers are not happy about being left out of the second round of forgivable loans. Of the nearly 90 craft grow licenses that were awarded, only 13 licensees applied through the first round, of which 10 were selected, according to data from the state. That leaves plenty more need, Redman said.
“As far as growers are concerned, we don’t see why [loans to growers and dispensaries] can’t be done in parallel,” Redman said. “There should be no reason why they can’t have X dollars for one and Y dollars for the other.”
Bolton declined to set a timeline for when borrowers will be invited to apply, but she confirmed the second round will consist of “direct forgivable loans fully-funded by the state,” and will not pass through third parties. However, the department is asking for proposals for “technical assistance.”
Ameya Pawar, who co-owns social equity licenses for three cannabis dispensaries, said he was encouraged by the state’s decision to step directly into the role of lender instead of turning to third parties.
Pawar is a former Chicago alderman and an outspoken advocate of public banking. He said the state should take advantage of the fact that it can define creditworthiness much more broadly than private lenders do, which would open opportunities for more borrowers.
“The return for a public lender isn’t just the repayment of the loan,” Pawar said. “The return is that you’re expanding the tax base. You’re creating jobs. You’re creating more income taxes and sales taxes.”
“It gives us the opportunity to look past that traditional pro-forma,” he added.
He said the fund’s likeliest path to success is to return to low-interest, nonforgivable loans, and for the state to remain the sole underwriter.
Mendez of the Woodstock Institute agreed, saying the state’s loan program is a good start until there’s a federally legal business model to fund the industry.
“The challenge is going to be, where does the state get the money to lend?” he said.
Jackson and Al-Sabah of Helios Labs aren’t waiting around to find out. Last month, they opened a downstate dispensary in Tilton, near the Indiana border, with plans to use sales revenue to seed their grow operation in Broadview.
But the plan already hit a hiccup.
“We had just closed on a capital raise that would have allowed us to start growing while we ramp up the dispensary business,” Jackson said. “However, that investor is in the process of potentially defaulting right now.
“So, we’re still trying to figure it out.”
