Cannabis Industry Loans & Financing – Possibilities Looming After Legalization?

Cannabis Industry Loans & Financing – Possibilities Looming After Legalization?

Since the 1990s, when states started passing laws that made medical cannabis legal within their jurisdictions, businesses in the industry have faced difficulty funding their ventures. A handful of traditional lenders have loosened their restrictions, but it’s still incredibly hard for anyone in the cannabis industry to get a loan or other type of financing without going to private sources.

That may change soon as a Democrat-led Congress and White House consider changing laws that make traditional lenders wary of cannabis. In the meantime, private lenders outside of the traditional banking system offer the best option for people who want to start or expand their cannabis businesses.

Federal Cannabis Prohibition Makes Funders Worry About Legal Consequences

Over half of the states in the U.S. now have laws that legalize medical or recreational cannabis. Most states that have legalized cannabis have reputations as liberal places. That caricature looks accurate when focusing on states that allow recreational cannabis sales, although Alaska is an obvious outlier.

Banks Feel Pressure to Turn Away Cannabis Businesses

Many states passed recreational and medical cannabis laws based on the promise of collecting additional tax revenue that they could use to pay for education, drug rehabilitation, and other critical programs. Outrageously, many of the cannabis companies responsible for raising those funds cannot even use banks. A state like California might say that dispensaries and farms operate legally, but the federal government still follows laws that categorize tax-raising entrepreneurs as criminals.

The conflict between state and federal laws have created a lot of concern in the banking industry. Since the federal government regulates banks, many of them choose to avoid all cannabis activities. Knowingly opening accounts for cannabis businesses could lead to charges of money laundering from the federal government. Even under the Obama administration, which said it would largely ignore cannabis activity in legal states, banks worried about the repercussions of dealing with businesses operating on the legal fringe.

Funding Becomes Impossible in a Conflicted Legal System

Banks concerned about being labeled as money launderers have similar concerns when cannabis companies apply to borrow money. Accepting the loan application could make the bank look like an accessory to large-scale drug manufacturing and distribution.

To make matters worse, the federal government could target the person responsible for accepting the loan application. That person could face prison time and professional consequences.

It’s unlikely that banks worry about such consequences with Biden in the White House. He will most likely take a position similar to Obama’s. But banks know that political positions matter much less than laws. While the Obama administration may not have focused on above-board cannabis businesses, the Trump administration took a different perspective. Paranoia about how quickly political influence can shift became apparent when former-president Trump made Jeff Sessions the U.S Attorney General. Few politicians have a more rabidly anti-marijuana perspective than Sessions. With Sessions in charge, anything could happen to the rapidly growing cannabis industry.

Banks take the same view when they consider extending loans and other types of funding during the Biden administration. They know that the current president will only hold his position for a few years. After that, the federal government’s priorities could change overnight.

Only Congress can pass laws that make banks feel safe lending money to cannabis businesses. Until that happens, banks will not take any risks in the industry.

Private Funding Offers an Alternative to Bank Loans

Private cannabis lenders have fewer concerns than do banks and credit unions. Organizations within the traditional banking system have a lot to lose by stepping out of line. Even losing FDIC accreditation could force a large bank with multiple locations to close. An ongoing investigation into illegal activities would also force branches to close while the federal government snooped through their documents and interviewed employees.

Private funders don’t need to worry as much about the federal government. As long as they work with cannabis businesses that follow state laws, they shouldn’t run into legal issues by funding dispensaries, farms, and labs that make concentrates, edibles, and similar products.

Do Cannabis Businesses Really Need Outside Funding?

Cannabis businesses need outside funding just as much as do businesses operating in other industries. While a cannabis business might quickly recoup the money it borrows, it still needs to pay for upfront costs months or years before it earns its first dollar.

Even growing cannabis sold as smokeable flowers takes months of work. Farmers can expect to spend:

  • About one week waiting for seeds to germinate.
  • Three to eight weeks for the plants to grow stems and leaves.
  • Five to sixteen weeks for the plant to grow flowers.
  • About four weeks to harvest, dry, and cure the flowers.

A cautious cultivator will not plan to earn money on a crop for at least seven months. During that time, the farm’s expenses include paying for labor, electricity, water, soil, nutritional supplements, lighting, and pest repellants.

Of course, the cultivators also need to pay for the buildings or land where they plan to grow cannabis. Browsing the property listings advertised on, potential buyers can see that land for sale can easily exceed $10,000 per acre. Farms become much more expensive when they include buildings for processing cannabis and storing equipment. The smallest hydrocarbon extraction closed-loop system from the popular equipment manufacturer Iron Fist Extractors costs thousands of dollars. That doesn’t include the price of plant material and solvents.

Entrepreneurs that want to purchase active dispensaries can expect to spend millions of dollars. Even a small dispensary in California can cost at least $4 million. Delivery businesses often cost $250,000 or more. Unless the buyer has millions of dollars on hand, the person will need to find funding to help pay for the purchase.

Equipment for making cannabis and hemp concentrates also costs a lot of money. Growing interest from consumers makes purchasing extraction equipment worth the investment. Still, business owners can’t enter the market until they can buy reliable equipment that does the job well.

Congress May Change Laws, But It Hasn’t Happened Yet

Congress could pass cannabis laws that make banks feel comfortable working with the industry. Even a law that decriminalizes cannabis would make it easier for banks to fund cannabis businesses without concern.

Some members of the 2021 Congress have already issued statements promising to pass laws that will help banks support legal cannabis businesses. Promises from a few liberal members of Congress from states that have already legalized recreational cannabis, however, might not mean much. Until Congress passes a comprehensive law that either decriminalizes cannabis at the federal level or gives banks permission to work with cannabis in legal states, the banking system will shy away from opportunities.

Frankly, banks should shy away. Promises have been made many times before. Still, the country has a confusing system of cannabis laws.

Private Cannabis Credit Issuers and Lenders Fuel Industry Growth

Many private cannabis credit issuers and lenders have competitive rates and products that match those from traditional banks. The biggest difference is that private lenders are willing to work with businesses in the cannabis and hemp industries. Some of of the private financing options available in the cannabis industry include:

  • Lines of credit for cannabis and hemp businesses.
  • Equipment financing and leasing.
  • Working capital loans.
  • Short-term working capital loans.
  • Asset-based and collateralized loans.

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February 19, 2021Comments Off

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