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.
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.
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.
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.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
InsightFinancing Options for Cannabis CompaniesAndrew LinesFor cannabis companies seeking financing, it can be difficult to understand what factors lenders consider when evaluating a business’s eligibility.
Press ReleaseFlowertown and CohnReznick Team Together to Provide Extensive Business and Marketing Services and Consumer Education to the Maturing Cannabis IndustryFlowertown, a rapidly growing cannabis media and marketing brand, and CohnReznick LLP, one of the largest accounting and consulting firms in the country, announced today that they will be teaming to deliver a comprehensive suite of services to the cannabis industry.
InsightThe SAFE Banking Act Would Be a Giant Leap for Legal CannabisMaier N. RosenbergThe Secure and Fair Enforcement (SAFE) Banking Act, which, in March, passed the U.S. House Committee on Financial Services by a significant bipartisan margin, represents a promising step forward for banks and cannabis companies that want to take sales out of the cash-based market and into the mainstream.
Insight5 Key Factors to Consider Before Making a Cannabis AcquisitionBeau Whitney & Andrew LinesWith talk of a looming recession, many analysts predict that during a downturn there will be a short list of growth industries that can deliver a healthy return on investment. Cannabis is near the top of that list. In fact, spending on legal cannabis in the U.S. is expected to increase from the current $12.9 billion to $20.4 billion in 2022, according to New Frontier Data.
Insight6 Ways Cannabis Companies Can Maximize Their Sale PriceBeau Whitney & Andrew LinesConsolidation is a natural phase of any industry lifecycle, and cannabis is no different. As legal cannabis continues its rapid growth, the market is beginning a new phase of consolidation.