What Will It Take for Banks to Dive Pocket-First Into Cannabis?

03/31/2020 - Blog

For now, the cannabis industry is waiting to be whisked away from costly high-risk banking programs and delivered into the protection of federally insured banking privileges.

As we covered on The Cannabis Industry and Its Fascinating Impact on CRE last month, only 8.4% of all U.S. depository institutions are currently dealing in the marijuana market and the needle is barely moving.

Fear of repercussions from the federal government is keeping federally insured funds from flowing in this emerging, $14 billion dollar industry, but the tides are slowly changing.

Cannabis Continues Casting Its Anchor in the American Economy During Coronavirus Outbreak

Perhaps the biggest win for the cannabis industry today is the support it's receiving from governors of states impacted by COVID-19 who have issued directives for the interim closure of non-essential businesses.

So far, in all 33 states where marijuana is legal, medical cannabis stores have been deemed essential businesses and allowed to remain open. Massachusetts stands out for allowing medical access, but pausing recreational marijuana transactions.

Still, the industry remains in financial limbo.

Chris Boden of Crouse and Associates Insurance Services attended a Mortgage Bankers Association’s (MBA) Insurance Stakeholder and Conclave meeting in October of 2019, and attested to the lending industry's cautious, yet abundant interest in cannabis:

“Largely speaking, there was a lot of interest. Many banks and lenders see the cannabis business as a huge opportunity, so they were asking lots of questions about the details of regular business operations. For instance, they asked all about the types of equipment used, the values of the businesses, and how cannabis retailers are typically paying their bills. They also wanted to know about the different insurance coverage options that are available, which they might later request if they were to back a loan.”

So Who's Actually Lending To Cannabis Today?

Not surprisingly, some of the biggest lending institutions are actually the first to bank marijuana businesses: Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup.

According to a study by the American Banker Journal, Bank of America was the most accommodating of the four, with over 50% of medical cannabis businesses using BoA for business banking.

Additionally, ancillary supply is a popular starting route for lenders that want to dip into the marijuana market, but do not yet feel confident in taking on a dispensary as a customer.

Private lending firm Monroe Capital LLC is helping fill the financial gap left by banks with its $50 million secured credit deal with KushCo Holdings Inc., a publicly traded company that operates in cannabis-related products and accessories.

“We wanted to figure out a way to finance the market leaders, and KushCo we think is a best in class company in terms of ancillary supply,” said Ted Koenig, Monroe Capital's president and CEO. “We’ve got a lot of capital and are looking for high-quality companies where we can get comfortable with the business.”

One avenue credit unions and state chartered banks are taking to offer banking services is through virtual payment networks, such as CanPay. With CanPay, customers preload their credit union funds into the network's app, then use it to make debit-like payments at dispensaries. CanPay effectively serves as a middleman between customer and business, providing them a way to effect cashless transactions.

Waiting for the Green Light

Some capital flows for some, but cannabis businesses remain focused on the next big goal since the legalization of medical marijuana: legislation that protects banks serving the legal cannabis industry, and the federal decriminalization of their product.

While the latter may be harder to come by, two pieces of legislation have been garnering attention and support for the last several months: the Secure and Fair Enforcement (SAFE) Banking Act, which would enable banks to offer loans and other banking services to marijuana businesses, as well as the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act, which seeks to remove cannabis from the list of controlled substances, and to create grant programs that counteract the devastating impact of the war on drugs in certain communities.

While both bills continue to garner public support, the Republican-led Senate has made clear its intention to pass on all cannabis-related bills, leaving the industry to continue innovating its own financing path.

In the meantime, cannabis businesses rely on a growing community of cannabis-specialized service providers to help them navigate regulatory, business, and real estate strategies.

EBI Consulting is proud to offer Energy Audits, Indoor Air Sampling, and additional property condition services to cannabis businesses nationwide, to help ensure dispensaries are making practical and long term real estate and energy decisions.


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