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How Banking Challenges Impede The Growth Of The Cannabis Industry Today

May 14, 2019 10:07 am
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With recreational cannabis now legal in Canada and many U.S. states, 2019 seems poised to become a turning point for the industry. However, within U.S. borders, one thing still limits growth: Cannabis companies’ lack of access to banking and financial services.

Until legislation like the SAFE Banking Act, which is currently in the House of Representatives, shifts the headwinds, cannabis companies will continue to have limited access to financial products most businesses take for granted. Here are some of the key challenges presented by the cannabis banking landscape today.

Banks have low capacity for cannabis customers and charge high fees

Because financial institutions fear federal legal penalties that could include loss of their FDIC insurance, only a few hundred banks nationwide actively operate cannabis accounts. Most are small credit unions with capitalizations in the tens of millions, and most won’t take more than 30 percent of their deposits from companies in a single industry (as is standard among financial services providers). This means that while some banking options exist for cannabis companies, capacity is severely limited.

Additionally, most banks charge cannabis accounts thousands of dollars per month in fees to offset the increased compliance burden, putting financial services out of reach for smaller cannabis companies.

Operating in a cash environment creates additional costs

Limited access to financial services drives some cannabis companies to do business entirely in cash. Operating in an all-cash environment makes accurate record-keeping a challenge. A recent audit of the Nevada Department of Taxation’s Marijuana Regulation and Enforcement program found that the state missed out on hundreds of thousands of dollars in tax revenues due to inaccurate record-keeping by cannabis businesses. Cannabis companies that file inaccurate returns must pay late fees and other penalties, adding to the already considerable costs of operating without bank access.

Loans are lacking, but REITs offer one solution

Perhaps the biggest challenge holding the cannabis industry back is lack of access to loans. Today, much of the cannabis sector’s growth is fueled by venture capital investment. However, this route isn’t an option for cannabis entrepreneurs who don’t want to give up equity in their business or who don’t expect the fast growth that yields venture-level returns.

Banks are understandably hesitant to make traditional business loans to cannabis companies, which lack federal bankruptcy protection, but some cannabis companies have obtained loans against real estate or equipment. In addition, a growing number of cannabis-focused real estate investment trusts (REITs) offer a kind of debt financing to cannabis companies by purchasing their cultivation facilities or other properties, then leasing back to them. However, like credit unions that charge high fees to compensate for increased risk, REITs charge a premium for their services, making them a less than ideal long-term solution.

A legislative solution is necessary

The cannabis industry has made impressive strides without traditional banking, but continued lack of access will hamper the industry’s long-term growth. Legislation like the SAFE Banking Act would help cannabis companies access the financial tools they need to efficiently run and effectively expand their businesses.

Image sourced from Pixabay

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