Cannabis Business Loans and Lending: What’s The Real Deal?

There are few adages that prove more accurate to business owners than “you have to spend money to make money.” Loans are a common, and necessary, way that many businesses obtain the working capital they need to grow and expand: 43% of small businesses applied for a loan in 2019. However, unlike the millions of other small businesses in the U.S., cannabis-related companies have historically had a hard time securing the funding they need from traditional financial institutions. Though the immediate future may remain difficult for many, there’s evidence that a recent groundswell of support could change everything when it comes to cannabis companies in need of lending.

Why has lending traditionally been difficult to secure for cannabis businesses?

It’s common knowledge that financial institutions generally operate with a risk adverse mindset. Any potential for major losses—barring shady practices like those that led to the subprime mortgage meltdown—are vehemently avoided. Since cannabis is listed as an illegal Schedule I substance under the U.S. Controlled Substances Act (CSA), it would only make sense then that banks would want to stay away from lending to a cannabis company.

Unfortunately, that couldn’t be further from the case. Banks aren’t afraid that the federal government’s prohibition on cannabis would cause any direct harm to their continued operation. Instead, they’re worried that the federal government will seize the borrower’s assets in the event that the business in question is raided and shut down. Though the government at the federal level has maintained its stance that it’s leaving legal cannabis businesses alone, it remains a legitimate concern for financial institutions. That’s mostly because those very assets are usually offered as collateral against a loan. If the collateral becomes seized property, the bank no longer has access to those assets, effectively undermining the loan’s viability.

That becomes incredibly important once you realize that unlike other industries, banks do not generally offer unsecured loans to cannabis-related businesses. While that type of loan is generally provided so collateral is unnecessary, and is generally fine for small business loans up to $100,000 (the bulk of small business loans), starting and operating a cannabis business can be an extremely expensive endeavor. With cannabis startup funding costs in the millions, it’s impossible to get that kind of loan without providing collateral of some sort.

Without access to unsecured loans and a banking industry that’s skittish to give secured loans to companies they believe could lose their collateral, cannabis businesses are effectively cut off at the knees in a financial sense. At the individual business level, this means that entrepreneurs just starting out must seek out alternative lenders, like their friends and families. Otherwise, they must gather funds and save up over the course of several years.

Larger companies that have a consistent flow of cash can sometimes weather this lack of funding, but also run into the same problem of having to generate the funds they need, rather than being able to quickly borrow cash from the banks. This lack of access can have a stagnating effect not just on individual businesses, but on the entire cannabis industry.

This same aversion from banking institutions combined with federal illegality had industry-wide implications during the COVID-19 crisis, as funds from government recovery efforts like the Paycheck Protection Program generally barred access for cannabis operators.

Some banks are coming around to the idea of lending to cannabis businesses

While only a little more than 207 cannabis industry-friendly institutions exist across the country, there are some encouraging signs that lending may lighten up in the future. Banks have started seeing the growing cannabis industry as a potential wellspring of new business. As a result, financial institutions began dipping their toes into the concept of lending funds to cannabis businesses about a year ago. Progress on the matter was unfortunately forced to take a backseat, as COVID-19 and the ensuing lockdowns put the kibosh on moving forward. Yet as those restrictions are lifted and the economy recovers, it’s expected that discussions surrounding lending to the cannabis industry will resume.

As of now, the loan-to-value (LTV) ratio for cannabis businesses currently hovers at around 65%. That figure is still markedly low from the 80% to 90% LTV that mainstream industries enjoy and is much closer to what businesses can obtain from an alternative lender. As a result, when cannabis businesses can borrow funds, they can typically borrow less on the same amount of collateral as a comparable mainstream business.

Ongoing developments in cannabis lending

The federal government has a major hand in how banks deal with the cannabis industry. While important victories in November 2020 at the state level has pushed legalization of adult-use cannabis to the fore, legislators in Washington D.C. have already begun considering how an exploding cannabis industry should be regulated.

On April 19, 2021, the House of Representatives passed the Secure and Fair Enforcement (SAFE) Banking Act with a largely bipartisan result of 321 to 103. Though not the first time this bill has made it past the House, it’s the first time that it will likely make it to the floor of the Democrat-led Senate, which is working on its own version of the bill. If passed there (and signed by President Joseph R. Biden, Jr.,), the SAFE Banking Act would have the general effect of easing cannabis banking restrictions.

While the bill includes language that protects banks supporting the industry against anti-money laundering laws, it also directly addresses lending. If signed into law by Biden, the bill would make it so “a federal banking regulator cannot take any adverse action on a loan made to” a cannabis business. While not providing a blanket ‘safe harbor’ for institutional cannabis lending, it would go a long way towards encouraging banks to increase industry access to traditional credit facilities.

Conversely, Senate Majority Leader Chuck Schumer (D-NY) is working on a federal legalization bill that would put an end to prohibition all together. Where the SAFE Banking Act and the CLAIM Act might open up access to lending from financial institutions to a significant extent, federal legalization efforts would instantly turn the cannabis industry into a more mainstream business. Without the potential for asset seizure and formal backing from the federal government, banks would feel less worried about getting in bed with a cannabis company.

While it’s exciting to think that Schumer’s bill could bring about such a massive change, it’s important to temper those expectations. The specific regulations expected to be found in the bill will be developed by various governmental agencies. Those agencies may have a different idea of what federal legalization would look like and the ensuing regulations may hinder some of the more sweeping changes that could come from such a bill.

As the country waits for substantive changes in how cannabis is handled federally, businesses in the cannabis industry will remain in a sort of financial limbo. This sort of restriction should last for some time still, so in the meantime they must o find an amenable financial institution to help. Without a guiding hand to find such a bank, those companies could be left without any funding. Thankfully, some banks have begun opening pilot programs to explore how lending to cannabis companies would work.

What to expect from lending pilot programs

Cannabis banking reform is on the lips of American legislators, and it’s only a matter of time before financial institutions feel comfortable enough to open their pocketbooks for to cannabis businesses. With the future being an almost foregone conclusion to many, some banks have opened dispensary lending and other similar pilot programs for different cannabis industry sectors.

These programs are often set up as trial runs for the real thing. Through these programs, banks could set up a limited number or amount of loans for cannabis clients, depending on the financial institution.

Even if you know that a bank is conducting such a pilot program, the branch may still turn you away, claiming that no such program exists. At Fincann, we have found that in those cases, management may have set up the program but failed to alert their branches or branch managers. Oftentimes, access to these pilot programs require knowing the right people to get started, which may be difficult if you don’t already have a relationship with that bank.

Why lending from a bank is preferable to alternative lenders like private lenders
After reading about all the difficulty surrounding loans and the cannabis industry, you may be tempted to seek assistance from a private lender. While it’s true that banks only lend on a case-by-case basis and 90% of lending to cannabis businesses is done by private lenders, it’s important to remember that those private lenders know how hard it is for you to get approval.

That perceived power imbalance between a borrower and the private lender can often result in more expensive rates. Unsecured growth and working capital loans can be extremely expensive. For example, if you borrow $50,000 under one of these programs, you may be required to repay $70,000 over four or five months, with an effective annual interest rate in excess of 100%. Privately funded commercial real estate and equipment loans typically charge between 12% and 16%.

Loans from a traditional bank, however, are notably cheaper. Interest rates for business loans typically hover between 5% and 6%. Getting financial backing from a bank also provides a range of financial protections that you may not get from a private lender. And while working with a bank will be preferential for many cannabis businesses in the long run, finding one with a lending program at the moment remains challenging.

Recently, in cooperation with several private lending groups, Fincann has partnered with several private lending groups willing to offer single-digit (5% to 9%) interest rates to well-qualified cannabis borrowers. So there’s evolution and light at the end of the tunnel in this respect.

How to find a cannabis-friendly bank loan

Finding a bank for your cannabis business doesn’t have to be as hard as it seems. We at Fincann pride ourselves in the ability to connect pioneering cannabis companies with the financial institutions that will help propel them to the next stage. Through our Cannabis Banking Financial Network and years of experience working with the cannabis industry, we have helped scores of companies find the right banking partners for them.

If you’re searching for lending options, Fincann now offers access to commercial real estate financing, equipment loans, and working capital loans through our network of lending partners. Better yet, our process is 100% transparent and compliant with all existing state and federal regulations.

For more information on our services and to see if you qualify, feel free to either contact us and speak with a Fincann representative or fill out a pre-qualification business profile questionnaire today to see if we have what you need.