Despite all of the progress that has been made over the past ten years, the marijuana industry as a whole still has a major barrier to overcome: the banking industry. Banking is the biggest issue for legal marijuana business owners all over the country, quite simply because they don’t have access to regulated banking.
Why Banks Won’t Loan to Marijuana Businesses
The Federal Deposit Insurance Corporation (FDIC) will not insure a bank that takes on “Existential Risks”, in other words: loans to companies in violation of federal law. Furthermore, banks themselves don’t want to have any criminal liability for aiding and abetting activities still considered federally illegal, even if it is legal at the state level. Although this law hasn’t been widely enforced with marijuana banking, knowingly accepting deposits from or loaning to marijuana businesses can be considered money laundering. This combination of ambiguous laws and regulations is stopping the marijuana industry from becoming an accepted part of our economy, and is hurting business owners all over the country.
The Unintended Results of the Ban on Marijuana Banking
Marijuana business owners are therefore forced to operate as all cash businesses and successful dispensaries can take in well over $250,000 in cash per month. These massive amounts of cash flow make dispensaries, and other marijuana businesses, prime targets for robbery. The harsh banking regulations on marijuana businesses are actually putting businesses at a public safety risk.
Back in June, 2018, there were a few different federal banking law proposals that would create a legal banking environment for marijuana business. Representative David Joyce (R-OH) said, “The issue is not whether one approves of marijuana. This is about public safety and financial transparency.” Unfortunately, these marijuana banking bills were voted down over the summer.
Another difficulty that marijuana businesses face due to restricted banking is the lack of ability to use financial leverage to operate. Most businesses take out loans to purchase buildings, buy equipment, extend credit to their customers, and fund other business activities. This is especially common in the agriculture industry, where farmers will have a lot of expenses for a full year and then one big influx of cash at harvest time.
What can Marijuana Business Owners Do?
While legal marijuana business owners probably won’t have access to mainstream banking until marijuana comes off of the federally controlled substance list, there are still other options for financing that may prove incredibly helpful.
Private Money – The most common type of lending to a marijuana business comes from a private loan. Private money may come from friends, family, associates, or other people within your circle. They might want equity in the company, a high interest rate loan, or just desire to see you succeed. This is typically the least expensive form of financing for somebody just getting into the marijuana industry, and sometimes the only form of financing available.
Personal Loans – A personal loan is a loan that is based on the individual applicant. The lender will look at their credit, personal income, and other assets, and decide how much money to offer them. These are useful because the lender often doesn’t care about the use of the money, just your ability and likelihood of repaying it. One marijuana friendly loan source is www.copperstreetlending.com . They work with loan brokers that send applications to several different lenders to see what the best option is for your situation.
Asset Backed Loans – Another type of financing available to marijuana companies is asset backed loans. These assets can range from equipment, to automobiles, to intangible assets like brands and websites. Asset backed loan structures vary widely. Sometimes the lender will buy the equipment through a different entity and lease it to the operator, and other times they will just loan the money to the operator directly with a lien on the equipment.
Hard Money Real Estate Backed Loans – Hard money lenders are often used in real estate transactions as an alternative to traditional banks. Since they are typically individuals, or groups of individuals, hard money loans aren’t affiliated with banks. If the lender is willing to work in the space, the loans can also be used in marijuana related transactions. Hard money lenders are typically very focused on the value of the deal, the likelihood of it making money, and the experience of the borrower in similar transactions. The loans are usually expensive, but the capital can be deployed immediately if they decide to fund the deal, and you have the opportunity to make your case about why they should work with you.
Until the federal government loosens up on marijuana businesses, many obstacles are going to remain for operators in the industry. While there are options available for financial services in the space, they remain few and far between.