The ability to access capital is a critical component for most businesses, but for those in the cannabis industry, it can be especially difficult. Despite the increasing social acceptance and legalization of cannabis in states across the country (and countries around the world), companies in the cannabis sector continue to face significant challenges when it comes to securing funding.
The biggest hurdle these businesses face remains federal cannabis prohibition, which often prompts risk-averse lenders to shy away from providing the crucial funding for sustained growth and success. Under federal law, any financial transaction involving cannabis-related businesses—even those with state licenses—could face scrutiny. As a result, banks typically aren’t willing to expose themselves to that level of risk, which leaves many cannabis businesses without access to essential banking services like loans, lines of credit, and basic checking accounts.
Capital sources and challenges for cannabis businesses
In my experience working in the cannabis banking industry, one of the biggest barriers businesses and entrepreneurs face is accessing capital. Private lenders are the most obvious option, but even if that money can be secured, it comes with steep interest rates and fees. Another challenge is that institutions typically can’t offer loans using cannabis products as collateral. This means businesses can’t use their inventory to secure loans.
Commercial real estate and equipment financing are two of the more common types of credit we see extended in the cannabis industry given it’s secured by non-cannabis collateral. Generally, the terms will be more conservative with the additional risk which can include higher debt service coverage ratios, lower loan-to-values, and higher pricing. Moreover, borrowers should be prepared to offer a personal guarantee, which is a common requirement in commercial lending to underscore the commitment to repaying the loan.
Solutions and tips for accessing capital in cannabis
First and foremost, cannabis businesses that need capital should adopt best practices to improve their chance of securing it. Strong accounting practices are crucial because they provide lenders with a clear picture of a company’s financial health and viability. A certified public accountant experienced in the intricacies and nuances of cannabis industry policy and regulations can be an invaluable team member.
Another best practice to attract and secure capital is establishing accounts with reputable financial institutions that are familiar with the cannabis industry and provide businesses with access to vital banking services. Smaller banks and credit unions often offer more flexibility and personalized service compared with larger traditional banks. Cannabis companies can leverage their relationship with an industry-savvy banking partner—and the accompanying financial transparency and stability—when seeking capital.
Financial reform on the horizon for the cannabis industry
Legislative reform efforts slowly working their way through Washington, such as the SAFER Banking Act, signal potential changes that could enhance a cannabis company’s access to capital. Should the federal government reclassify cannabis from Schedule I to Schedule III of the Controlled Substances Act—as federal health officials have recommended—it could unlock more lending opportunities. Reforming such policies would also ease the burden of heavy tax codes, such as section 280E, which currently burden cannabis businesses. This change would offer much-needed financial relief to the entire industry.
Accessing capital in the cannabis industry remains challenging for businesses of all sizes. However, by implementing best practices, building a relationship with a financial institution that’s comfortable with cannabis, and exploring alternative funding options, companies can enhance their chances of securing the financing needed to not only survive but thrive in this dynamic and evolving sector.
Brett Ballman is the First Vice President of Business Services and Consumer Lending for Salal Credit Union. He began his career as a federal bank regulator before moving on to hold senior leadership positions at various community banks and working in global operations for a Seattle-based fintech company. He is a graduate of Western Washington University and the Graduate School of Banking at the University of Washington.
