The cannabis industry is caught in a tug of war between federal and state laws. What does this mean for funding cannabis businesses?
Cannabis is a booming economic sector in the United States. The U.S. cannabis market is valued at about $10.8 billion and is expected to register a 14.9% CAGR between now and 2030. Additionally, countless pharmaceutical, food and beverage, agricultural, cosmetic, chemical processing, and recreational businesses rely solely on the cannabis trade. According to the 2022 Leafly Jobs Report, these businesses support 428,059 full-time jobs as of January 2022.
The industry owes its growth to the recent and ongoing legalization of marijuana in various states. As of November 2022, medicinal cannabis is legal in 39 states and the District of Columbia, 19 of which have also legalized recreational cannabis. Furthermore, the public perception of the industry has changed drastically as Americans grow more receptive to marijuana. Also, cannabis traders have really widened the market scope through creative product variations targeting novel applications and niches.
But despite being a lucrative and promising industry, there’s an ugly side to the cannabis trade. This has to do with legal and industrial discrimination when it comes to funding cannabis businesses.
Let’s take a deep dive into the financial challenges facing cannabis growers, distributors, and retailers in the U.S. and how they can be solved.
While this industry wouldn’t exist without cannabis legalization, the legislation has a bitter caveat. Although several states have fully legalized the marijuana trade, marijuana is still listed as a Schedule I controlled substance under the federal Controlled Substances Act (CSA). This means the possession, use, sale, or distribution of marijuana remains illegal under federal law. Additionally, organizations licensed by or affiliated with the federal government may not provide commercial services to any business operating under state marijuana laws.
Most commercial banks run under federal law and the Federal Deposit Insurance Corporation (FDIC), barring them from financially engaging with state-licensed cannabis enterprises.
Banks that hold accounts with cannabis businesses do so under strict guidelines dictating how they document, track, and report cannabis-related transactions. Non-compliance with these regulations attracts heavy fines, legal action, and other severe repercussions. Consequently, very few bankers are prepared to go through such risky scrutiny. According to the latest available data, only 755 institutions out of the nearly 5,000 commercial banks in the country reported serving cannabis businesses.
Without banking services, cannabis entrepreneurs cannot access lending opportunities such as commercial loans to grow existing ventures or start new ones. This is the first and biggest obstacle in funding cannabis businesses.
Another problem with operating a business without banking options is that all monetary transactions must be done in cash. This presents a number of challenges to do with safety, business growth, and customer interaction.
For starters, a cash-only transaction model is difficult to manage and blinds the entrepreneur to valuable market and business growth insights. It also inconveniences customers by limiting them to just one mode of payment. Plus, cash transactions do not make for a very convincing ledger, nor do they contribute to business credit, further shrinking the businesses’ financial opportunities.
Working solely with cash is also a major security concern. Cash-heavy cannabis establishments are tempting targets for burglars and robbers, putting the safety of the businesses along with their owners, staff, and customers at risk.
Crime incidents in cannabis dispensaries are quite rampant. Data compiled by Crosstown shows that burglary and robbery made up 71% of all cannabis-related crimes in Los Angeles between January and February 2022. This is not just an LA problem either; it’s happening in other places too. For instance, the Denver Police Department estimates that an average of 100 cannabis-related burglaries occur annually — an alarming statistic in a city with barely 150 marijuana store licenses.
Although the social stigma surrounding cannabis is fading, it’s yet to disappear completely. As a 2020 study surmises, “No one doubts remarkable improvements have been made in recent times, but claims that cannabis is normalized at the societal level may be premature.”
Some Americans still see marijuana as the hard drug it's long been made up to be, perhaps unaware that many cannabis products on sale today are not stimulants at all. On top of that, punitive laws against cannabis use and trade continue to fan this antiquated belief.
Top of the list, the Department of Defense strictly prohibits all military members and its staff from using marijuana. The Department of Veterans Affairs, again being a federal agency, does not recognize or recommend medicinal cannabis to veterans despite being a proven PTSD relief. Also, the Federal Gun Control Act prohibits users of any controlled substances from owning firearms and ammunition. Under this law, cannabis users are not allowed to have guns for the same reasons as hard-drug addicts, which many would argue isn’t fair.
Clearly, none of these laws (and many others) make a positive case for the cannabis trade. This is another reason some financial institutions want nothing to do with cannabis businesses. You can’t really blame lenders for seeing this as a high-risk industry.
The first step to eliminating social, legal, and financial discrimination against cannabis businesses is harmonizing the federal and state laws regarding the cannabis trade. Legalizing cannabis at the national level has proven a tough sell, especially given that cannabis is still criminalized in several states. However, things may be looking up on this front. President Joe Biden recently pardoned thousands of Americans convicted of marijuana procession following a review of federal marijuana laws. It's a small win for the community but nevertheless a significant step in the right direction.
Also, the SAFE Banking Act pushing for financial equity in the cannabis industry is gaining some traction. If passed, the act could end the punitive measures barring depository institutions from working with cannabis enterprises.
Hopefully, once the government shows more support for the cannabis business, the financial sector and the general public will follow suit. And ultimately, every cannabis farm, shop, processing plant, or dispensary will be regarded just like any other business. But that could take a while. In the meantime, thriving private companies can empower cannabis start-ups and businesses to shake off financial hardships through B2B lending.
Loanspark provides Business Lending as a Service (BLaaS) through co-branded partnerships, enabling non-financial organizations to fund other businesses using alternative commercial loans. This arrangement is known as embedded finance, and it’s taking the business lending world by storm. It helps enterprises in underserved communities, such as the marijuana industry, access the funds they need to thrive. Embedded finance brings funding solutions in otherwise hard-to-reach or disadvantaged niches.
Our co-branded alternative loans do not fall under anti-cannabis federal jurisdictions, making them the ideal financial support for cannabis entrepreneurs. We also partner with B2B cannabis businesses looking to empower their customers through accessible, haggle-free funding.
The Loanspark process is pretty simple too. We use our fintech expertise and resources to develop the funding program and assimilate it into your offering. Our job is to ensure that the final product checks all the boxes, has a strong and secure digital backing, matches and reaches the intended borrowers, and benefits your business by increasing its brand value and income.
Make your stand on sustainable financing and financial equity today with Loanspark. Let’s talk more about how we can do this together.