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Cultivating Equipment Finance in the Cannabis and Hemp Industries

Date: May 18, 2020 @ 05:00 AM
Filed Under: Specialty Finance

The legal cannabis and industrial hemp industries have been projected to be among the fast-growing sectors in the U.S. by 2025. Los Angeles, CA-based Xtraction Services was founded in 2017 to provide equipment leasing for those industries. The company, in a first-quarter presentation, stated it had completed four leasing contracts, one sale-leaseback and that it had more than 70 OEMs within its Preferred Vendor System. In May, XS entered into a lease agreement, for up to $3.4 million of new equipment, with PharmaCann Inc., one of the largest privately held and vertically integrated cannabis companies.

Equipment Finance Advisor met with Kenneth L. Senter, CLFP, Client Services Manager, at Xtraction Services, a direct lender providing essential equipment leasing solutions exclusively to the legal cannabis and hemp industries, to learn more about the company’s initiatives. Senter is an industry veteran with more than 30 years of experience in equipment leasing. He has served roles in sales, management and training, as well as operating a lease/finance consulting business for over 15 years.

Equipment Finance Advisor:In your view, what makes the legal cannabis market attractive for equipment financing?

Photo of Kenneth L. Senter, Client Services Manager, Xtraction Services

Kenneth Senter: Legal cannabis is the fastest-growing industry in the United States, with projected sales to reach $30 billion by 2025. Industrial hemp is the fastest-growing crop in U.S. agriculture, with projected sales to reach $16 billion within the same timeframe.

Right out of the gate, large amounts of equity capital were readily available to fund this growth, as everyone wanted to be a part of these new and exciting industries. However, as these industries matured, the ability to attract the same level of equity financing diminished. Traditional bank lending is either non-existent or severely restricted, leaving cannabis and hemp companies in desperate need of alternative funding sources. XS has currently been funding transactions via private placement and working on a larger credit facility to service its pipeline.

Equipment Finance Advisor: Can you provide our readers with an overview of Xtraction Services and what hurdles it has faced?

Senter: Xtraction Services (XS) was founded in 2017 to address these challenges I outlined. Realizing the majority of capital being raised in the industry was for infrastructure build out and necessary equipment purchases, XS decided to create the lending platform needed to fund the all-important, related capital equipment.

Today, XS specializes in providing equipment leasing solutions exclusively for the cannabis and hemp industry. XS customers include cultivators, oil processors, manufacturers and testing laboratories — to name a few. XS is a direct lender with all underwriting and funding provided in-house. XS also offers a full range of consulting services, including equipment selection and procurement, through its network of Preferred Vendor partnerships with original equipment manufacturers and equipment distributors.

As with any new industry, it requires a rapid learning curve to understand the pain points and opportunities. As an example, all cannabis companies are subject to Internal Revenue Code Section 280E, which restricts the ability to deduct ordinary business expenses. XS anticipated the need to not only build a foundation for traditional underwriting, but also for technical and analytical needs.

Equipment Finance Advisor: Please tell our readers a bit about your underwriting process in this unique lending sector.

Senter: Our in-house technical and analytical team works directly with underwriting. Since every prospect is projecting hockey stick growth curves, and with more and more operators entering the space, Xtraction Services needs additional data points to underwrite its customers better. The team provides analytical reporting of equipment (capabilities versus projections) based upon the customers’ feedstock or end product, which allows us to “poke holes” in many of the opportunities. Further, most of the facilities are being built from scratch, so the technical and analytical team needs to understand every aspect of manufacturing and processing, including equipment capabilities, production, supplier inputs and the supply chain for those inputs. In addition, there is a myriad of restrictions affecting certain types of equipment processing, and regulatory controls vary from state to state. The key is having the knowledge base to mitigate these risks. It requires us to understand the challenges facing the industry, along with the players within the OEMs and operators. Our team can answer the questions about the equipment’s capability or how the potency of feedstock impacts the total throughput, and what is the expected lifecycle of the equipment being purchased. All of these data points are collected and examined as part of a broader picture.

Next, we focus on the OEMs, with the goal of becoming familiar with the equipment offerings. Many of the OEMs are undercapitalized themselves and lack the necessary infrastructure to support industry demands. To mitigate the risk to our business and our customers, XS has established its Preferred Vendor Program to partner directly with the OEMs. Our technical team assesses the vendor’s service agreements, type and duration of warranty coverage, and ensures that frequently replaced parts are readily available. This allows us to get comfortable with the manufacturers serving the industry and how they operate, which in turn, mitigates technology risk. Additionally, these programs create a robust sales channel that supports our core business, while allowing OEMs to offer white-label solutions for their direct customers. XS currently has more than 85 preferred vendors.

This understanding of the underlying equipment allows XS to provide a customer-focused underwriting process. XS works directly with all of its preferred vendors and maintains weekly discussions and reviews, to ensure a constant flow of communication for effective deal origination and positive customer experience. Furthermore, the XS team can lend their expertise to ensure customers are choosing the right equipment for their needs and help in determining if additional equipment would be required in the near future. With a rapidly growing pipeline, our technical and underwriting team’s expertise ensures we continue to partner with the right OEMs and operators.

Equipment Finance Advisor: What does the future look like for cannabis and hemp companies and what types of financing programs are you offering to meet their needs?

Senter: While the valuations of cannabis and hemp companies have tempered and available capital remains low, the growth trajectory for the industry remains strong, which provides a substantial opportunity for Xtraction Services. This opportunity certainly comes with its challenges, given the varying regulations and technical knowledge required; this is not an easy vertical to underwrite.  However, XS has developed the right team with the right experience to help mitigate the inherent risk associated with these opportunities.

Our current financing structures include programs for new equipment, as well as sale-leaseback arrangements to re-capitalize existing assets. The Preferred Vendor Program has proven invaluable and continues to pay off in a multitude of ways. XS is well-positioned for growth, with a robust pipeline of new prospects and repeat business opportunities and is seeking capital partnerships to facilitate even more.

Mike Dickinson
Editor | Equipment Finance Advisor
Mike Dickinson is Editor of Equipment Finance Advisor. Dickinson has more than 30 years of experience as an Editor and Reporter. He spent 20-plus years at the Rochester Business Journal in Rochester, NY, including 18 years as Managing Editor. He also covered Eastman Kodak, technology, optics and telecommunications, among other areas. His writing and reporting on Eastman Kodak won 1st Place – 2012 National Newspaper Association Best Business Story and the Gold Award – 2012 Alliance of Area Business Publishers for Breaking-news coverage. He also won the Silver Award – 2001 Alliance of Area Business Publishers Best Coverage of Local Breaking News – Global Crossing. Prior to working in the business news arena, Dickinson was a reporter for the daily newspapers in Syracuse, NY, and Batavia, NY. Dickinson holds a Bachelor’s Degree in Mass Communications/Journalism from St. Bonaventure University.
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