By Alex Leonowicz
From an outsider’s perspective, the cannabis industry can look rosy. For instance, the state of Michigan is on pace to hit a record ‘high’ $3.2B in overall sales in 2024, highways are littered with cannabis billboards and many dispensaries still have lines out the door. The industry is massive. But, a closer examination reveals an underlying problem for even the largest operators – securing traditional lending. This challenge creates a unique opening for banks and financial institutions willing to navigate the complexities of this burgeoning industry. By understanding the nuances of cannabis operations, regulatory frameworks, and risk management, banks can position themselves at the forefront of this evolving landscape.
The first challenge cannabis companies face is accessing capital stems from the legal ambiguities surrounding cannabis businesses. Even in states where
cannabis is legalized for medical or adult use (i.e. recreational), federal laws still classify it as a Schedule I controlled substance. The rescheduling of cannabis has not yet occurred. This disconnect means that banks, which are federally regulated, remain wary of lending to cannabis companies due to potential legal repercussions. More specifically, the potential liability stemming from the Anti-Money Laundering (AML) and the Bank Secrecy Act (BSA) which can carry personal and financial consequences if not closely adhered to. As a result, these companies often resort to using personal funds, seeking private investors, or engaging in high-interest loans from non-traditional lenders.
Moreover, the stigma surrounding cannabis still lingers, affecting how financial institutions perceive risk within this sector. Many banks and credit unions continue to shy away from the industry, fearing reputational damage or complications arising from associations with an activity that has long been viewed through a lens of legality and morality. This cautious approach contributes to a lack of capital availability and creates barriers for cannabis businesses looking to grow and expand.
Despite the challenges that cannabis companies face in securing loans, this environment also presents a significant opportunity for banks. The potential profitability of the cannabis market is compelling. According to various reports, the global cannabis market is projected to reach $73.6 billion by 2027, driven by increasing legalization efforts and consumer demand. For banks willing to take the plunge into the cannabis sector, the prospect of high-return investments and the chance to establish a foothold in an emerging industry can be enticing.
Before diving into cannabis lending, banks must thoroughly understand the unique dynamics of this industry. First and foremost, financial institutions need to familiarize themselves with the extensive regulatory landscape governing cannabis operations. While some states have made headway in enabling legal businesses, the rules can differ significantly from one state to another. Compliance with state regulations is paramount, and banks must ascertain that potential borrowers are operating legally within their jurisdiction.
Furthermore, cannabis businesses often require specialized knowledge when it comes to evaluating their financial health. Unlike traditional businesses, cannabis companies often face distinct barriers, including fluctuating market prices, changing regulations, and a reliance on cash transactions due to banking restrictions. Therefore, banks should invest time in developing expertise in cannabis operations to conduct thorough risk assessments. Understanding the supply chain, cultivation methods, product distribution, and sales strategies will help banks evaluate the viability and profitability of potential loans.
Another crucial aspect banks should consider is the importance of maintaining transparent communication with cannabis clients. Building trust can alleviate some of the skepticism surrounding the banking relationship. Open dialogues regarding financial practices, compliance efforts, and operational challenges will foster a better understanding of cannabis businesses, leading to more informed lending decisions.
Additionally, banks should consider embracing innovative solutions to reduce the risks associated with lending to the cannabis sector. This might include developing tailored financial products designed specifically for cannabis companies. By offering services like cash management, payment processing, and tailored loan products, banks can create revenue streams that align with the needs of the cannabis market while managing their exposure.
Educational efforts are another avenue banks can pursue as they navigate this challenging terrain. Organizing workshops or informational sessions for cannabis entrepreneurs can not only provide valuable insights into financial management but also establish the bank as a knowledgeable and supportive financial partner. By positioning themselves as educators in the space, banks can generate loyalty among cannabis companies and enhance their reputation within this developing sector.
In conclusion, while the journey for cannabis companies to find reliable lending sources is fraught with challenges, it also presents remarkable opportunities for banks willing to embrace this market. By understanding the legal landscape, investing in specialized knowledge, fostering open communication, and developing tailored financial products, banks can confidently step into cannabis lending. As the cannabis industry continues to grow and evolve, financial institutions that proactively navigate these complexities will not only thrive but also play a vital role in shaping the future of this promising sector. As the legal tide shifts and public perception evolves, it may soon be clear that, when it comes to cannabis, the green rush isn’t just about the crop — it’s also about the capital.
About the Author
Alex Leonowicz is a dynamic, award-winning corporate attorney with Howard & Howard. He has served as in-house counsel for several of the top cannabis operators and his decade of real-world experience in the industry offers a unique perspective for companies and financial institutions looking to work with or enter the complex and ever-changing cannabis marketplace.