Things to Know About Cannabis Financing

Financing for cannabis businesses is not as standard as some other industries where a business plan, a meeting with a local large bank, and underwriting time will usually secure a business loan. For entry into the marijuana trade, bank financing is not probable, as all major banks are regulated by the federal government which considers transactions related to cannabis as criminal activity, therefore, federally chartered banks do not involve themselves with the cannabis realm.

The SAFE Banking Act

An amendment to this issue is in process via the SAFE Banking Act, the nation’s first stand-alone cannabis reform legislation. This act seeks to provide protections to financial institutions working with state-licensed cannabis businesses, extending to them the same protections afforded other business types. It has passed the House, and was received in the Senate on September 26, 2019 where it was read twice and referred to the Committee on Banking, Housing, and Urban Affairs. In 2019, 633 banking intuitions reported financial activities involving marijuana-related business activity, a near doubling since 2014.

SAFE verbiage includes addressing the lack of access to banking by cannabis-related businesses. Currently, many operate in a cash-only environment, which has severe consequences including increased violent crime, higher costs, and reduced law enforcement access to financial data. Additionally, the SAFE Banking Act will increase funding opportunities to women and racial minorities who face well-documented barriers in accessing non-bank investment dollars.

Although the passage of SAFE will not likely cause large financial institutions to suddenly engage with financing for cannabis businesses, it does project to increase options in terms of community banks, credit unions, and minority-depository institutions (MDIs). This should lower costs, increase security, make the cannabis black market less alluring, and create new customers.

As SAFE is still pending legislation, cannabis financing is still largely through cannabis debt financing and equity financing. It is important to note all banking institutions, not just major ones, take risks when handling marijuana money, therefore there is no guarantee any financial establishment will open an account or offer other financing products like loans and credit cards.

Existing Cannabis Financing Options

Below are the most popular options for financing cannabis business:

• Equity funding, or investment in the common stock of a company, can be achieved through venture capital, angel investors, and crowdfunding. Each of these options has platforms available that are cannabis-specific.
• Debt funding via loans or business credit cards is home base for alternative lenders and financial platforms who work in the marijuana industry. Online lenders tend to offer short-term options such as working capital or lines of credit with a quick turnaround. Be aware of very high interest.
• Debit system (a.k.a. using credit cards) is used but can be problematic. Due to existing regulations, using a personal credit card for cannabis business is technically illegal.

While there are ways for individuals to finance a business in cannabis, Sal Barnes, Senior Expert of MPG, who works directly with cannabis investor groups, cautioned that entering into the cannabis industry without prior experience is increasingly difficult. As the marijuana business world is very well capitalized, it is now full of ideas, assets, and funding for investors, which include the best ways to enter cannabis production, distribution, and retail. Additionally, cannabis investors are shifting away from extending loans to companies in favor of investing in shares; the number of opportunities to invest in private equity and managed funds also has increased. Consider this option of entry when reviewing cannabis debt financing.

Consider Alternatives

Overwhelmed by the complexities of beginning, running, and investing in a cannabis-related business? Barnes advises to also ruminate hemp as an option that is more entrepreneurial friendly. According to Bloomberg, sales of hemp could top $24 billion by 2023. CBD has become wildly popular across the United States and can be legally extracted from hemp, which is defined by federal law as cannabis sativa with 0.3 percent or less THC. Due to the most recent Farm Bill signed into law on December 2019, hemp is now legal to cultivate and process in all 50 states, as opposed to marijuana. Practical uses for hemp range from clothing fiber, to oil for fuel and soaps, to seeds to consume with high levels of Omega-3 and 6 fatty acids.

Learn more with CannaCon

Whether you are researching, entering cannabis and hemp commerce, or are an established fixture, CannaCon is your source for information, updates, and connections. Check the website regularly for pertinent articles ranging from state by state legislation and licensing, to Things to Know Before Applying for Your Cannabis Business License, to 6 Mistakes Cannabis Business Owners Make (and How to Avoid Them), and more!