Lending and the Cannabis Industry

Lending and the Cannabis Industry


Roughly 70% of legal cannabis businesses cite lack of banking as their biggest concern according to Whitney Economics, a leading economic consulting firm in the cannabis banking industry. This contradicts what some vendors in the cannabis banking industry claim which is that every cannabis company that wants a financial institution has one. The disparity is that there is a huge difference between having some access to move and secure money and having access to traditional banking services.

    One of the factors contributing to diminished profitability in the cannabis industry is the lack of affordable and stable banking options. As a career bank CEO, I know how valuable a good and open relationship can be for a traditional business with a bank. Those businesses that worked with good and responsive banking representatives in securing PPP loans would certainly attest to that. Of course, the cannabis industry was not eligible for the PPP or any other SBA lending or assistance program. In fact, there are a lot of traditional financial services that help businesses manage liquidity and maximize profitability from which cannabis businesses are excluded (This will be even more evident as interest rates rise).

    One of the biggest inhibitors to cannabis businesses operating with the same profit margins as traditional commercial customers is the lack of affordable debt available to the industry. Commercial businesses use debt to finance premises, equipment, inventory, and cash flow. There is some debt available to the industry, but most of it would hardly be called affordable-think 12 to 15% to finance a commercial building. The good news for the industry is that there are small number of financial institutions (banks and credit unions) that are beginning to offer debt to their cannabis companies.

    HDCS recently wrote a wholesale cannabis lending policy for a bank in the mid-west which received a non-objection from the bank’s prudential federal regulator. The policy includes an adaptation for the allowance for doubtful accounts, risk rating methodology, oversight and other specific credit policy and administration adjustments specifically for the cannabis industry. While regulated financial institution lending needs to be focused on collateral that is non-plant related (i.e., commercial real estate and equipment), adding that leverage at affordable terms is a tremendous benefit to their cannabis customers while providing a significant boost to the institution’s traditional net interest margin (the difference between the rate it pays its customers for their deposits and what it charges customers on their debt). Furthermore, HDCS is actively working on providing financing alternatives on plant-based collateral (AR/Inventory) outside of the institution.

    Finally, there are a whole host of other financial services that are not readily available or affordable to the industry. Insurance, investments, consumer products, payroll, escrow, and title are all inconsistently provided and at a significant variance of costs and terms. As the financial institution has a robust program for vetting and monitoring their cannabis banking customers (assuming they have a sustainable program that will endure future regulatory scrutiny), they can serve as a conduit for additional financial services without those ancillary services having to build their own comprehensive programs.

To learn more about the HDCS comprehensive cannabis banking and lending solution, visit our website at https://hdcompliance.com/.

Andy Montgomery

Founder & CEO  |  HDCS, Inc.

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