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.
With the Farm Bill passed, there are some experts who are forecasting that the hemp growing industry could exceed $20 billion by 2022. Up until the passing of this bill, the industrial production of hemp in the United States was limited to mainly pilot or research programs.
An Overview of the Farm Bill for Hemp Growers
The Farm Bill was long-awaited by those in the industry and removes industrial hemp from the list of controlled substances created by the federal government. With the removal of this classification, it is now a lawful, agricultural commodity in the U.S.
Originally, this hemp legislation was introduced by Mitch McConnell a Republican from Kentucky and the Majority Leader for the Senate. In addition to removing hemp from the controlled substances list, the law also allows states to become the main regulators for the cultivation of hemp, while enabling researchers to apply for and receive federal grants, and even allows the crop to be eligible for crop insurance.
Today, the $800 million hemp market in the United States is mostly made up by the non-psychoactive compound CBD. Products with CBD can be used for treating an array of medical conditions, which range from arthritis and epilepsy to multiple sclerosis and chronic pain. Each state has unique laws that regulate the use and production of CBD.
Financing Options Before the Farm Bill
Prior to the passing of the Farm Bill, funding options for growing hemp in the U.S. were significantly limited. There were many entrepreneurs who opted to self-fund using business profits or personal savings.
While options weren’t widespread, there was equity and debt financing resources for this industry. One such company, the Colorado-based Dynamic Alternative Finance has helped to arrange the financing of more than $27 million in leases and loans for cannabis and hemp businesses in the past two years. This was done by connecting the network of private investors they had built with the business owners who were looking for capital to grow their business.
Since there weren’t many traditional lending options, and no government programs or SBA to help, many entrepreneurs in this industry opted to take out a home equity line of credit, raise funds through family and friends and use their credit cards.
There were a few smaller banks willing to fund businesses in this industry, and in the state of Colorado there were at least eight, but fewer in other states. One of the biggest factors that made lenders hesitant to fund these businesses prior to the passing of the Farm Bill was that technically, the federal authorities could raid and shut down the business down at any time.
Benefits of the Farm Bill for the CBD and Hemp Industries
With the passing of the Farm Bill, those in the hemp industry are experiencing a wide array of benefits. Now, the industry is projected to grow significantly, and since hemp is no longer considered a controlled substance, there are no federal regulations that restrict farmers from being able to grow or sell hemp.
Another benefit of the Farm Bill is for those companies that focus on hemp-derived CBD. Without a ban on this product, entrepreneurs in this industry can gain access to financial services that are vital to the operation, growth, and sustainability of a business i.e. bank accounts, credit card processing, mortgages, and business loans.