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Will Access to Banking and Financial Products Open the Flood Gates For Cannabis & Hemp Businesses?
The laws concerning cannabis and hemp have been in flux in recent years, led in part by changing attitudes toward both crops. Some states, such as Colorado, have legalized pot for medical and recreational use, while others, such as Illinois, have made the substance legal for medical use only. Many states have worked to decriminalize marijuana, and only four states currently ban all forms of cannabis and cannabinoids: South Dakota, Idaho, Kansas and Nebraska. Even the anti-marijuana state of Tennessee allows CBD oil made from hemp. The news is even brighter for hemp fans. The recent farm bill legalized hemp on a federal level, making it a totally legitimate crop. These legal changes for both cannabis and hemp are affecting the way that financial institutions think about these crops. As a result, there should be a flood of new cannabis and hemp businesses opening in the coming months and years.

Financing for Cannabis and Hemp Production and Sales

Those in the cannabis industry have financing options, but they remain limited due to federal law. In fact, the big banks still will not allow these businesses to open checking accounts since they are not legal at the federal level, and these financial institutions are protected by the FDIC. As a result, marijuana producers and sellers have had to pursue more creative financing options and places to store their operating capital.
Financing has become less problematic as more and more states legalize marijuana for medical and recreational use. While a few entrepreneurs are wealthy enough to self-finance, most need to pursue other paths. Some take out personal loans or home equity loans, while others seek financing from private investors. These investors might be limited to friends and family, but some venture capitalists have entered the cannabis industry, including well-known names from private industry. Securing this funding may mean giving up partial control of the business or the need to pay higher interest rates since the lender is incurring higher risk. Marijuana growers cannot secure federal crop insurance, even though they are at great risk from severe weather events and destructive pests. Many investors are hesitant to proceed without this federal coverage.

Cannabis and Hemp Financing Future

Until recently, hemp growers had many of the same financing problems as cannabis producers, and growers and sellers had to pursue the same type of funding. Those in the hemp industry now have more options since the legal status of hemp has changed. Traditional financing options are now or will soon be offered to hemp producers, although provisions will have to be made for the regulations and testing that will apply to those in the industry. Federally insured banks will accept hemp business accounts and consider producers and sellers for loans as they do other farmers seeking financing. 2019 should see more and more financing options open up for hemp farmers, but these changes are definitely still in progress.
More private and business investors are willing to finance cannabis concerns, so financing should be easier to acquire in the coming years. Until cannabis is legal on the federal level, however, large banks and more traditional lenders will not be in the cannabis business. In fact, every state in the Union can legalize cannabis, but until the federal government does, financing choices will be limited.
A recent poll shows that 62% of Americans believe cannabis should be legalized. Once a position held mostly by “liberal” citizens, cannabis has found widespread acceptance. Most experts believe that cannabis will be legalized, hopefully in the next decade, and when that happens, the industry should see rapid growth and inclusion as a mainstream investment. The profit potential is huge, and investors can expect a healthy return on their investment. People will be rushing to put their money into businesses that are poised to be huge money-makers.

Final Thoughts

Hemp and cannabis financing currently are in flux. Since most states have legalized some form of cannabis, more private investors and some financing companies are working with producers and retailers. Large financial institutions still will not work with these businesses since cannabis is not legal on the federal level. Without federal protection, their investments are too risky. Under the Obama administration, the DOJ had a “look the other way” policy toward cannabis enforcement, but the current administration has been less accommodating, which has made prospective investors pause.
Large banks should be offering new financing packages to hemp farmers and retailers soon now that hemp has received the federal stamp of approval. Hemp will be regulated, but those in the business can expect more favorable financing options than before.
February 14, 2019 / by / in
Venture Capital in the Cannabis & Hemp Industries

Banks Are Afraid to Work With the Cannabis Industry

Many businesses turn to banks to secure the funding they need to open storefronts and purchase the products they want to sell.

Unfortunately, the federal government still considers most cannabis products illegal even though 33 states and the District of Columbia have legalized medical or recreational cannabis sales. This puts banks in a difficult position.

Nearly all banks fear that giving loans to the cannabis industry will lead to retaliation from the federal government, which oversees banking regulations.

Undoubtedly, many banks want to extend loans to new businesses in the cannabis and hemp industries, but their legal teams advise against it even though many pro-business members of the government support legalization. Even former Speaker of the House John Boehner, who historically has been against cannabis legalization, now supports the industry. Regardless, banks fear retaliation from a federal government that could reprimand them for participating in illegal activities.

The relationship between banks and the cannabis industry is so problematic that only 30% of legal cannabis sellers have bank accounts. Technically, banks can service cannabis suppliers in states where sales are legal. The government, however, requires banks to file reports for every transaction from cannabis businesses. The amount of red tape makes it nearly impossible for banks to serve the industry in any way.

Venture Capitalists Offer Hope for the Growing Cannabis and Hemp Industries

Since banks cannot serve the growing cannabis and hemp industries, venture capitalists have stepped in to fill the gap.

Venture capitalists aren’t burdened by the same regulations as banks. Instead, they can choose to support businesses that they believe will generate profits. Venture capitalists still face some concerns, but several groups have already shown that they can invest in the cannabis and hemp industries successfully.

Estimates suggest that venture capitalists invested about $355 million in the cannabis industry in 2017. Experts expect 2018’s amount to exceed 2017’s.

Several investment groups have risen to face the challenge of supporting startups in the cannabis and hemp industries. Some of the funding provided by venture capitalist groups help businesses pay for:

  • Greenhouses where they can grow hemp and cannabis.
  • The construction needed to build dispensaries.
  • Equipment purchases for growing and manufacturing products.
  • The real estate that businesses need for cultivation and storefronts.

How Much Money Can Venture Capitalists Earn From Cannabis and Hemp?

Although it varies from firm to firm, most venture capitalist groups earn money by charging management fees and taking a percentage of a business’s profits.

In most cases, management fees are pretty small, about 2%. The real money comes from the 20% to 25% of profits that venture capitalists take for funding businesses.

The specific amount of money that a venture capitalist earns will depend on how well a business performs. Currently, most cannabis businesses don’t have a problem earning large profits. In Canada, for instance, many cannabis stores ran out of stock within one day of legalization.

The extreme demand for legal cannabis means that venture capitalists have the opportunity to earn tremendous returns on their investments.

The amount that venture capitalists can earn, though, depends on the taxes that state charge. In Washington, cannabis retailers must charge a 37% sales tax. In Massachusetts, though, dispensaries charge a 10.75% sales tax.

Since venture capitalists take their percentage from profits instead of revenues, dispensaries in some states may have a harder time attracting investors. Washington’s high tax rate will likely make it more difficult for businesses to attract funding from venture capitalists. Sellers in Massachusetts, however, should find that it’s relatively easy to secure funds since the low tax rate means more money for investors.

The Future of Cannabis and Hemp in America

No one knows how the future of cannabis and hemp will unfold in the U.S. Now that more than half of American states allow some form of cannabis sales, it seems likely that the federal government will change its stance toward prohibition in the near future. It probably won’t happen during President Trump’s term, however.

President Trump has said that he supports individual states that decide to make cannabis and hemp legal. He has not shown as much support for changes to federal law, though.

Encouragingly, bipartisan cannabis decriminalization bills were filed in Congress during 2018. The most prominent, called STATES (Strengthening the Tenth Amendment Through Entrusting States), was sponsored by Democratic Senator Elizabeth Warren and Republican Senator Cory Gardner. Unfortunately, Senate Majority Leader Mitch McConnell does not approve of cannabis decriminalization, so it’s unlikely that he will bring the bill to the floor for a vote.

No matter what the federal government decides, venture capitalists will continue playing a major role in the development of legal hemp and cannabis sales in select states. With so much money on the table, investors will find ways to support the industries in states where they have been legalized.

December 14, 2018 / by / in