Financing a Cannabis Business & Legal Limitations
An entrepreneur entering the cannabis industry will need to consider how to finance their business. Many ordinary businesses pursue loans from banks. This often does not work for a cannabis business, since the industry is illegal under federal law. Banks must comply with federal regulations, which make the process of lending to an illegal business risky and complicated. The Federal Deposit Insurance Corporation will not insure most banks that engage in this activity. Banks also may be reluctant to lend to a cannabis business because this activity could be considered aiding and abetting a federal crime. Until marijuana is legalized, moreover, a bank could be charged with money laundering for taking deposits from a cannabis business. (This does not generally happen, but US Department of Justice enforcement policies can change.)
Some banks have agreed to issue loans to cannabis businesses, but substantial fees specific to the industry may apply. These compensate for the burdens of working with a marijuana business. For example, a bank may need to file a suspicious activity report for each transaction involving the business. In other cases, a cannabis business simply deceives a bank by hiding its nature, such as by creating a deceptive business name. This usually only works temporarily until the bank discovers the true nature of the business.
Alternative Financing Sources
Since funding from banks is largely unavailable, many entrepreneurs in the cannabis industry have sought financing from angel investors or venture capital and private equity funds. They also may get support from certain private loan issuers that offer high-interest loans. Since it poses a higher risk for a lender, a cannabis business often must meet certain requirements to be eligible for these loans. For example, it may need to have a minimum level of gross sales, maintain a minimum credit score, and have operated for a minimum length of time before seeking the loan.
Sometimes a private investor may require a cannabis business to give the investor a substantial ownership stake in the business. While this may sound unattractive to a business owner, they may be able to retain full control over their operations. Cannabis businesses that supply marijuana only for medical uses, rather than recreational uses, may have a greater range of financing options.
Access to Other Bank Services
Businesses often use banks for many services in addition to loans, such as checking accounts and credit accounts. While some banks have started to offer these types of services to cannabis businesses, most remain reluctant. The logistics of operating a business can be onerous without access to these services. Instead, they must use cash for many routine activities, such as transactions with customers and vendors. A cannabis business may need to pay taxes to state authorities and pay salaries to employees in cash as well. This is a less secure and more time-consuming way of transferring funds.
