The pot business is—pun intended—growing fast. Marijuana is now a flourishing, multibillion-dollar industry.
But investors are struggling to get in the game. Why? Is it the ongoing taboos, changing growing conditions, or unpredictable political arena that’s making things tough for wannabe ganjapreneurs? Nope. It’s the American banking industry.
The current banking situation
Even though medicinal or recreational pot is now legal in more than half of the US states, federal law makes it hard for banks and credit unions to accept money from marijuana businesses. As a report from the Pew Charitable Trusts observed, the restrictions mean that legitimate marijuana businesses “can’t get loans, customers have to pay in cash, and state tax collectors are processing bags of bills.”
Thus, marijuana-related businesses either operate on a strictly cash basis, or try to skirt the law by concealing the true nature of their enterprise from banks.
“Think about how many times a day a normal business interacts with financial institutions—using a credit card, paying vendors, getting a loan, taking payments, running payroll, and writing checks,” says Andy Williams, CEO of Medicine Man Technologies, a firm that provides business services to the marijuana industry. “Then imagine having to run a business without access to what most business owners would consider fundamental.”
Major side effects
Serge Christov, a financial partner to Honest Marijuana, points to the problems he’s encountered as someone who owns a building that houses a pot business. “As a landlord, I am not a grower, manufacturer, or owner of the marijuana business that occupies my building, but I am unable to deposit the money I earn from the tenant because the money was made selling marijuana.” When Christov approached local banks, their answer was a definitive no. “It’s not every day that you hear a bank say no when you offer them money.”
On the short list of what Christov calls “things that are less-than-ideal” with the current cannabis banking situation:
- Few banks will accept cash from the cannabis industry, forcing entrepreneurs and investors to find financial institutions that are willing to work on a cash basis, and that’s no easy feat.
- Banks charge the marijuana industry a fee to deposit money, which is unheard of outside the cannabis industry.
- It’s illegal for banks to lend money to businesses in the industry, even where marijuana is legal under state and local laws.
Worse still is Christov’s inability to utilize the equity in his property. “I am unable to secure a mortgage on the real estate that I own,” he explains. “In any other industry, if I had a million-dollar building that was fully paid for, I would be able to get 60 or 70 percent equity to use for building and equipment upgrades. That is not the case in the marijuana industry.”
Christov said he has not seen a single person in the marijuana industry obtain legitimate financing from a bank on any of their real estate.
Why banks are hesitant
The Obama administration relaxed the outright prohibition against banks dealing with marijuana businesses, but the feds still impose burdensome restrictions that have intimidated most banks from getting involved with pot-related commerce.
“It’s frustrating,” says Jeffrey Zucker, president of Green Lion Partners, a business strategy firm focused on early-stage development in the regulated cannabis industry. “It makes running a sustainable, professional business even more difficult for cannabis business owners.”
Heather Molloy, the CFO of Jane West, which markets products to elevate the marijuana experience, says, “From an audit and compliance perspective, it costs banks more to work with cannabis companies than they can likely generate in fees. Additionally, if banks aren’t willing to lend to cannabis companies, nor introduce the cash into their related asset management platforms, then arguably the opportunity cost for the bank is high.”
Molloy says that, from an economic perspective, “it seems irrational” for banks to work with cannabis companies at this point in time. “Costs outweigh benefits,” she says. “There are short-term solutions to resolve some of the payment issues, but I haven’t seen a real solution to the broader banking issues of lending and financing.”
Williams adds that, in addition to these fundamental issues, employees and investors often face having their personal bank accounts shut down—making it difficult for them to get mortgages, loans, and credit cards—just because they are associated with a legal marijuana business.
A variety of short-term tech solutions are in the works to get around the banking issues, according to Zucker, “but I see them as a band-aid until the true solution is established, which is rightfully treating cannabis businesses like any other businesses when it comes to banking.”
One short-term answer to the banking and payments problems is the state-based closed-loop system, according to Tanya Hoke of Galen Diligence, a firm that provides expert investigative due diligence services to cannabis investors. In this system, the state would establish a stored-value account that transfers money among marijuana businesses and consumers. “In the best-case scenario, these systems will increase transparency and take cash off the streets,” says Hoke.
Hoke further explains that if the systems don’t cross state lines, then participating businesses enjoy some protection from federal interference. “Unfortunately,” she says, “setting up a closed system, especially one administered by the state, will be expensive,” and she predicts that the cost will be passed back to pot businesses and their customers.
The Trump factor
The election of Donald Trump has not helped the situation, if only because the administration has yet to make clear its stance on the industry. “The administration’s lack of predictability and [Attorney General Jeff] Sessions’ failure to acknowledge verifiable information about cannabis isn’t easing things [on the financial side of the industry],” says Molloy. “It’s likely encouraging US investors to sit on the sidelines and giving offshore investors the opportunity to buy up the next great American industry at lower valuations than they can find in other, better-regulated markets like Canada.”
Molloy adds, “If the administration wants to simplify taxes, create revenue, reduce crime, and improve quality and safety to consumers and businesses, as well as keep ownership with Americans—wouldn’t that make us ‘greater’?—then it needs to federally modify the tax treatment and banking of cannabis companies. Fingers crossed that the administration realizes that easing things for the cannabis industry is in line with its talking points.”
Says Hoke: Because of the conflict between federal and state laws, investors enter the industry without many of the protections they are used to:
- Cash isn’t FDIC insured.
- Federal business taxes are not deductible.
- The SEC is not regulating these businesses.
- Protections for creditors are murky.
Her advice to potential investors? “Your first stop should absolutely be to an attorney familiar with the industry in the state where you are considering investing,” she says. “This is an exciting industry with a ton of potential, but you must be clear-eyed and proactive in managing your risks here.”