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Challenges in Cannabis Financing

Challenges in Cannabis Financing

The legalization of medicinal and recreational marijuana in many American states has created a billion dollar industry quite literally out of thin air, growing new mom-and-pop shops along with super dispensaries that rake in huge amounts of money each year.  Yet ask any marijuana business owner about their anxieties, and you'll get plenty of information about how the pot business is precarious on a good day.  One key issue is access to financing, since many businesses struggle to get the money they need to get off the ground or weather a bad month.  Here are the three greatest challenges in cannabis financing.

1) Access to Banks

You can probably guess what percentage of all marijuana businesses in the nation today have access to challenges in cannabis financingbanking (and with it, security on their money, access to loans, and investment opportunities).  The sad answer is that it's not even split evenly—just 40% of pot businesses have a bank account associated with their operations, meaning that owners are quite literally storing cash in a safe to store for rainy days or to keep their profits secure.  Many banks are scared of the various federal laws that crack down on companies doing business with cannabis businesses, and while bigger banks have the lawyers and accountants needed to make sure everything is shipshape, this in turn creates more hoops for cannabis businesses to jump through.  Some banks see the writing on the wall and are trying to make accommodations, but that's far easier said than done, and some banks simply can't afford the risk to create a partnership.

2) Marijuana as a Schedule 1 Narcotic

Although millions of Americans use marijuana each year, the federal government remains locked in its ways by branding marijuana as a Schedule 1 drug, making it illegal federally and on par with the production or use of far stronger narcotics such as cocaine, heroin, or methamphetamine.  Efforts in Congress to move the needle and get marijuana on a lower schedule have, up to now, proved fruitless.  It's an open question whether this will change in the near future, since marijuana legalization has been put on the back-burner given the state of new social issues pushed to the front during 2020.  However, as it currently stands, this classification is a major impediment to lending, since a spate of laws restrict banks from providing funding to businesses that manufacture, sell, or otherwise promote Schedule 1 narcotics.  This includes restricting these businesses from writing off business expenses on their taxes if they're in the cannabis industry, leading in some cases to federal tax bills that approach a crippling 70% of business revenue.

3) It's Not Clear How Far The Chain Goes

If you own a marijuana business and need to purchase some mundane item—let's say receipt paper—is it legal for Amazon to sell you this good?  That's a murky question, since at the moment two major laws restrict the ability of companies like retailers to do deals with the cannabis industry.  Both the Controlled Substances Act and the Money Laundering Control Act punish companies that do deals with narcotic manufacturers.  It's not quite clear at the moment how much of what goods can be sold to pot businesses with few or no repercussions, but many businesses choose to play it safe and shut all their doors.  This is particularly a problem among finance companies like banks and credit unions, since there's far less "wiggle room" about providing capital than there is providing goods.  Without changes to these laws, it'll be a big risk for lenders to get into the game.

Posted by Canna Business Team



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