Although cannabis is technically legal in 33 states, it’s still a schedule 1 substance under federal law. Plus, most financial institutions fear working with the cannabis industry because of possible federal prosecution, even though the substance is mostly legal at the state level.
So, unfortunately, both in America and around the world there’s still a heavy negative connotation with the substance, which significantly affects the cannabis industry.
Every company deals with financial hurdles now and then, but there are solutions to anticipating them and navigating them. Plus, with legislators and other activists working on getting better solutions for cannabis companies, we can hope that the industry will improve in time.
Needs for Financing in the Cannabis Industry
Banks provide many perks besides being a safe place for storing money. They provide financial stability and without that it can be hard to keep cashflows running, expand operations, and even pay vendors and suppliers.
Banks offer lending opportunities so businesses can grow, plus the usual credit and checking accounts that operate electronically. Business often have quite significant unforeseen expenses that without a banking partner, can kill a small business.
TL;DR: Without the convenience of a bank, dispensaries operate in cash for their staff, customers, and taxes. Operating in cash only is a dangerous proposition.
As a result, many cannabis companies result in paying their staff and taxes in cash. Doing so creates several inconveniences for state tax offices and is sometimes dangerous for employees to carry around. Plus, many companies need to travel with armed guards and specially armored vehicles for extra safety.
Traditional Barriers/Challenges Unique to the Industry
Before we get too far, we must understand why it might be difficult for cannabis companies to keep a bank account. We must remember that banks do not like to invest in businesses that might put their portfolio at risk. Perhaps a business might not work, or the business might not make enough money back.
Banks are Wary of Cannabis Business Risks
Sometimes, state-chartered banks might approach a cannabis company for financial backing and then change their minds out of the blue, so these companies need to scramble again for assistance. The cannabis industry is growing, and still, there are limited options for some businesses’ financial safety.
Banks are wary of cannabis companies because of the extra staff they have to hire for such dealings. Plus, cannabis companies have to keep detailed records of all their customers, all of which must be legitimate for banks to approve them.
Thus, cannabis companies need to rely on word of mouth to find banks that don’t market their services to such companies. That, or they are relegated to choosing between whatever service is predominant in the region, regardless of quality or friendly lending rates.
Risks of “Suspicious Activity” Loophole that Banks Use
While most federal institutions fear getting in trouble, some banks use a loophole where they need to file “suspicious activity” under every transaction with a cannabis company. Companies can still make transactions, but it could become a risk and a hassle for banks to work long-term with them.
Some companies choose not to immediately label themselves as cannabis companies, opting instead for something less suspicious or obvious. Such a pretense does not last forever, so the companies incur additional risk by not being honest.
Third-Party Companies Penalized for Associating with Cannabis Businesses
Banking restrictions do not just affect the cannabis companies themselves. Any company associated with them, such as plumbing, cleaning, and marketing, even if they have no direct contact with the marijuana itself, can get hit with fees or penalties.
The good news is that cannabis companies can get backing. They just have to follow through with many compliance rules, such as the 2014 FinCEN guidance. Highly regulated companies have to jump through many similar hoops as cannabis companies.
Technically, the SAFE Act, passed through the House of Representatives, allows for cannabis companies to get financial backing without federal regulators penalizing those institutions.
Still, the industry is coming up with creative banking solutions when regular banks won’t give it a shot. Business loans just for cannabis businesses are among the largest solutions, but other alternatives exist too.
Joined Bank Accounts
Some cannabis companies team up into one omnibus bank account. Cashless ATMs allow dispensary customers to use their debit card but get a voucher instead of cash to use in the store.
Branded credit cards see charges from dispensaries, and they actively try to shut them down. Even if a cannabis company gets a bank account, it’s still risky for customers to use credit cards there.
Gift Cards and Vouchers
Gift cards work similarly, in that you can buy a gift card with a debit or credit card and then exchange it for marijuana. Like CannabisCoin and PotCoin, marijuana-specific cryptocurrencies help keep marijuana purchases safe from companies that would shut down cannabis operations.
Sales Systems Specifically Meant for Cannabis Companies
Some businesses create products that enhance day-to-day sales tasks for cannabis companies, like debit and point-of-sales systems. CanPay is a unique debit system that accepts payments from consumers who also use the platform. However, the federal government does not regulate CanPay. Still, it’s a more secure, legitimate option than only using cash.
Point-of-sales systems created specifically for cannabis businesses are a bonus. Plus, these unique systems help businesses stay compliant since they’re built entirely around the cannabis industry.
GreenBits is an excellent platform that includes state law integration, so you stay compliant. You can also add apps that enhance the sales experience and organize your clientele.
For something a little more involved, LeafLogix manages all points of your cannabis sales, including POS, distribution, cultivation, and so on.
Small Credit Unions or Charter Banks
Sometimes, marijuana businesses team up with small credit unions. However, that might mean extra fees for the businesses to pay. Banks need help to cover the extra time and security to process these companies’ transactions. Transparent electronic transfers are another viable payment option.
Some cannabis companies accrue legacy cash, which is their income, before they get a bank or credit union account. Businesses need the proper records indicating that the money is, in fact, theirs so the bank can accept it.
Money earned from shady organizations or money-laundering operations won’t likely get into a bank account.
420-Friendly Business Loans Specifically for Cannabis Businesses
Cannabis loans are available to finance almost every aspect of the business: farming, manufacturing, dispensaries, etc. They are even available to borrowers who would like to obtain business startup loans or funds to get equipment or operations.
Luckily, more and more banks are getting comfortable doing business with cannabis businesses. According to a U.S. Treasury report, the third quarter of 2019 saw 553 banks providing services to these businesses. This will only continue to grow exponentially as more states legalize cannabis use and banking services demand swells.
Some financiers are willing to give cannabis businesses a shot. The only downside is that they provide merchant cash advances, which are the most expensive business financing form because of the risks involved in working with cannabis businesses. Plus, they don’t provide these businesses with as many options as others.
You could try a VC firm, or venture capital, too. If your business does not want to take on any debt, this could be a good option.
Bear in mind that, when you accept VC business funding, you’re selling part of your cannabis business to them, as well as diluting your equity financing or your ownership percentage. Unfortunately, while most cannabis business funding comes from them, they remain relatively inaccessible to many businesses.
Types of Business Loans for Cannabis Businesses
- Business Loans: Lenders who offer real estate can also lend to business owners who need capital for things like inventory, business expansion, marketing, payroll, and more. Funding is only available via short-term loans.
- Grow Operation: This loan gets financed through private, hard-money products or when commercial real estate lenders offer short-term mortgages.
- Manufacturing Facility: Commercial real estate lenders might fund facilities that manufacture cannabis products.
- Equipment Loans: Equipment loans are available for those in need of new cannabis-growing or processing materials.
- Recreational or Medical Dispensary: Private debt and equity financing for recreational and medical dispensaries is growing in popularity. You’ll need proof of consistent, valid revenue to qualify.
420 Specific Crowdfunding Platforms
It sounds like a last-ditch, even desperate effort, but crowdfunding your business is another idea to try. Some platforms like Indiegogo and StartEngine have approved cannabis companies to use their platform. CannaFundr and Fundanna are crowdfunding sites specifically for marijuana.
Help from Certain Local Governments
There is hope for local governments to provide legitimate avenues for cannabis businesses. For example, the town of Oakland, California, set aside half of its cannabis business permits for unfairly targeted groups, like minorities.
However, the program is only available for people who have had a cannabis conviction in the city or have lived where unfair cannabis law enforcement occurred, among other stipulations.
In all honesty, until the federal government no longer considers cannabis a schedule 1 drug, more financial institutions and credit card companies might not accept accounts and charges from dispensaries. Even when it is legal, banks and credit card companies will start slowly.
Future of Cannabis Banking in the U.S
As mentioned, there is hope that the growing cannabis industry will see legitimate financial institutions coming to their side. Local governments, such as Oakland, California, have begun creating business loan money specifically for cannabis businesses.
However, politicians still need to thoroughly agree to pass legislation allowing total legality for cannabis businesses.
In December 2019, the House of Representatives passed the SAFE Banking Act, which would allow financial institutions to associate with and participate in the cannabis industry legally.
Entrepreneurs could get business loans for startup funding, one-off investments, and other perks that businesses need for full and secure banking.
Recently, the government passed another version of the SAFE Banking Act as part of another COVID-19 relief package. The act was a positive step forward since many cannabis businesses were deemed essential during the pandemic.
However, it doesn’t change the fact that cannabis is still federally illegal, and many small cannabis businesses continue to face tough economic times as a result.
However, medical experts expect that medical research on cannabis will increase in the next year or two. The research will include better quality medical trials to showcase the medical qualities of cannabis.
As more and more people understand these good qualities, the more legitimate cannabis businesses may appear.
Either way, cannabis businesses have to comply heavily with specific guidelines to maintain financial institutions’ trust. While the industry is growing, it might be a while before banks allow it the same freedom and options as other businesses.