Considerations for Regulated Financial Institutions in Lending to the Cannabis Industry

The truth is that there are multiple institutions that are providing depository services to the cannabis industry. In fact, there are far more than most realize. They break down into three categories:

1. Those that have a robust and scaled program, 
2. Those that have a pilot program or are experimenting with a small amount of cannabis businesses,
3. And, finally, finally those that have no idea of the extent that cannabis deposits are flowing through their institution. 

 However, only a small number of financial institutions are actively lending or considering lending to cannabis businesses.

Exploring Lending?

HDCS is approached with increasing frequency by institutions that are exploring lending to the cannabis industry. And, why not? If you have already developed a robust and comprehensive vetting and deposit monitoring compliance program, leveraging up a substantial cannabis base of deposits will produce outsized returns for the line of business. 

Let’s say you are starting from a net-zero cost of deposits (or more ideally negative) on a cannabis deposit portfolio, there is a significant demand on even homogenous (non-single purpose) CRE that a yield of 8% on a short-term maturity would be a discount to what is currently being offered by non-FI’s to the industry. Thus, even lending 20% of your deposit base with a better than 800 basis point spread is going to substantially increase the profit from the line of business and make those cannabis customers very sticky to your institution.

The HDCS Solution

Obviously, we advise our clients that there are unique considerations in lending to the cannabis industry that should be addressed. For example, we have developed an addendum lending policy, risk rating methodology, allowance methodology and credit approval process recommendations that are unique to the cannabis industry. We think adding this thought process and special consideration is not only regulatory prudent, but necessary because the cannabis industry is new and increasingly evolving-we don’t have 20-year RMA statistics on the industry. In our view, because of the preponderance of the abundant illicit activity and untested nature of the industry, any cannabis lending should be done with a risk premium and increased reserves.

Another issue we work with institutions on surround secondary support for loans. For CRE collateral that is not single purpose or marketable equipment, the increased risk is very manageable. However, if the primary source of repayment fails for a cannabis borrower, an institution, obviously, can’t take back any collateral that is associated with the plant itself. We work with the financial institution on alternative forms of collateral to provide that secondary support, but any institution that lends on cultivation, distribution, manufacturing, or retail directly associated with the plant will probably be classifying the loan as unsecured.

“Growth is never by mere chance; it is the result of forces working together.” – James Cash Penney

In summary, we believe that any financial institution that has put the appropriate infrastructure in place to solve the comprehensive, compliance framework necessary to run a safe and profitable cannabis banking line of business should at least evaluate providing some lending to their clients. It will not only boost the profits of the program, but as more and more financial institutions enter the market it will also make your cannabis clients harder to pry away.

HDCS always recommends that before engaging in cannabis lending that an institution presents a thoroughly considered plan and receives a non-objection from its regulators. HDCS is happy to help your institution walk through the considerations of cannabis lending and in developing a plan. 

To schedule a meeting to learn more about Cannabis Banking and Cannabis Lending success stories or cautionary tales, please contact us through our website at https://www.hdcompliance.com/about-us or contact me directly at a.montgomery@hdcompliance.com.

Andy Montgomery
Founder & CEO  |  HDCS, Inc.