Many are under the impression that banks do not issue loans to cannabis businesses. And while that is not precisely true, one could be forgiven for getting that impression. Cannabis lending remains a space dominated by private lenders, while banks remain cautious. As the culture around cannabis has changed even among the nation’s most powerful institutions, banks are increasingly dipping a toe into the waters of compliant and confident cannabis lending.
What are a cannabis business’s current lending options?
Roughly 90% of current lending to legal cannabis businesses is provided by direct private lenders generally supported by collateral in the form of commercial real estate or capital. Unfortunately, these private sources of capital tend to be expensive, typically ranging from 12% to 16% annual interest.
Unsecured working or growth capital loans tend to be short-term and based on average revenue generated over a 3-to-6-month period. It’s not uncommon for a business taking out such a loan of $50,000 to pay back an exorbitant $70,000 over four or five months.
As banks step in to offer conventional financing, these private lenders are feeling the pressure to bring their rates down. In fact, Fincann has recently collaborated with a few of our best private lenders to offer medium and large size loans to creditworthy borrowers at interest rates of between 5% – 9%. Today, the banks that are lending to cannabis businesses are generally very selective. Most only work with cannabis businesses they already know, and many have stringent credit and income requirements. Additionally, most banks as well as private lenders supporting the cannabis industry will only give up to 65% loan-to-value (LTV) ratio on collateral, whereas mainstream businesses can expect LTV ratios closer to 80% – 90%, resulting as a practical matter in additional restriction in access to capital.
Will access to cannabis lending improve?
Access to conventional loans in the cannabis industry is already gradually improving as the prospects for legislation like the SAFE Banking Act or comprehensive federal cannabis legalization seem to coalesce. With Senate Majority Leader Chuck Schumer (D-NY) leading the charge for a comprehensive legalization effort and his party in control of both chambers and the White House, there is certainly a feeling of momentum building on Capitol Hill.
While the pace of cannabis lending has been gradual thus far, that slow and steady progress shouldn’t be confused with stagnation. Lending is an inherently long-term activity, so banks piloting lending programs need time to evaluate their long-term viability. Even those willing to take the risk do so with caution. (This also emphasizes the importance of interested banks beginning their programs now, so they have good data to work from as the legalization tide turns.)
It’s important to note that the dearth of cannabis lending is not due to a lack of capital. Banks have a lot of dollars derived from THC licensees that aren’t being invested in lending or other profit-generating activities. Banks would love to put those dollars to work if it were only a certain enough prospect.
Unfortunately for most banks, the continued albeit theoretical risk of borrower asset seizure by the federal government, even though this risk is quite low, represents a threat to the security of loans. If
collateral were seized, banks would be left with an embattled borrower and no security to fall back on. Of course, the federal government has now left state-legal cannabis businesses largely unperturbed through multiple administrations – still, this ambiguity adds often unworkable risk for the both the banks and their examiners.
Generally, the momentum for cannabis lending should continue to build along with milestones like the signing into law of key measures. Naturally, the full-scale legalization of cannabis would move the needle quite a bit. But it is important to note that even legalization is not a light switch. Agencies must develop regulatory guidelines, which must then be deliberated upon in a public forum, then revised, then re-proposed, approved, reviewed, and then approved again. Bureaucracy takes years to implement its policies, and the lenders will follow the regulatory guidance. Even should landmark legislation be signed into law, cannabis lending is more likely to take the slow and steady path as regulations unfold and undergo revisions over time.
What should cannabis businesses do if they need a loan now?
If you need a loan and don’t want to work with a private lender, there are banks offering cannabis businesses conventional financing, but they are very few and far between. Working through a financial institution network, cannabis entrepreneurs can secure various types of financing to pre-approved borrowers, including real estate loans, equipment loans, fixture loans, vehicle loans, working capital, and startup financing.
To secure lending generally requires good collateral and credit, as well as a clear demonstration of fully compliant operations. Cannabis industry borrowers should expect to shoulder higher-than-average interest rates, though these are beginning to fall as the industry matures. Additionally, LTV ratios for cannabis businesses will be lower than other industries. Finally, borrowers must expect shorter loan terms.
Although more limited than their low-risk counterparts, financing is available for cannabis businesses, a welcome relief for businesses who cannot saddle the high costs associated with private capital. Pending developments around the SAFE Banking Act and federal legalization efforts offers encouragement that the momentum will only increase. As the cannabis industry grows, it needs access to capital; banks are going to be a pivotal part of providing the industry the liquidity it needs.