Last Updated 09/20/2019
All startups need adequate funding in order to succeed in their respective market. If you're opening a car wash or coffee shop, for instance, you might seek out a business loan from a traditional bank or credit union. But due to the ambiguous legal status of marijuana-related businesses, at least federally, banks have mostly shied away from such ventures. Even so, a few banks and credit unions have begun providing merchant services (deposits, lines of credit, credit card processing) and even some loans. However, several private, non-institutional investors have taken advantage of these investment opportunities.
This article provides guidance for small business entrepreneurs seeking marijuana business loans, with an explanation of why institutional banks have been hesitant to get involved. See FindLaw's Marijuana and Other Highly Regulated Businesses and Start-Up Financing sections for additional articles and resources for marijuana industry business owners.
One of the main reasons banks typically don't provide loans to marijuana ventures -- at least those directly involved with the plant or its derivatives -- has to do with the Federal Deposit Insurance Corporation (FDIC). Generally speaking, the FDIC will not insure a bank that takes on "existential" risks, which would include loans to companies in violation of federal law. However, some banks are willing to consider financing options that invest in marijuana-related businesses that avoid the legal risk of actually "touching" the plant (indoor growing equipment, for instance).
In addition, business funding for cannabis companies before recreational marijuana legalization happens is a concern for banks. The banks themselves would rather avoid criminal liability for aiding and abetting activities still considered felonies under federal law. Knowingly accepting deposits from a marijuana business can be considered money laundering, even though this has mostly not been enforced. The Department of Justice tolerates marijuana businesses in states where it's legal, such as Colorado, but that is subject to change with the political climate unless the United States government legalizes marijuana at the federal level.
A number of private investors have taken up the slack, backing marijuana businesses in the relative absence of bank loans. These include venture capital and private equity funds, angel investors (wealthy individuals, generally), marijuana business consulting firms that manage private funds, and private providers of high-interest loans.
One such firm, Albuquerque, New Mexico-based Platinum Finance Center, specializes in high-risk ventures, including marijuana business loans. Any marijuana business seeking a loan must:
Another example is Mentor Capital, Inc., a California-based public operating company that acquires and invests primarily in medical marijuana ventures. The publicly traded company takes a significant ownership stake (equity) in its portfolio companies in exchange for funding but allows the companies to retain full operating control. Seattle-based Privateer Holdings is yet another private equity firm targeting the cannabis industry but primarily invests in Canadian ventures since Canada has fully legalized medical marijuana. You can read about marijuana stock legal information to learn more.
As this industry matures and the laws change, the obstacles to financing for marijuana-related businesses are likely to diminish.
Even without the need for a loan, marijuana businesses need a way to deposit money and write checks to partners and employees. Some marijuana businesses do use traditional banks for their day-to-day banking needs but hide the true nature of their business. Some even go as far as spraying their cash with air fresheners to cover up the tell-tale odor of marijuana. Others use third-party services for debit card sales and related merchant services.
Securing financing for a marijuana business is quite difficult, but the rewards are potentially huge in this rapidly growing market. The laws regulating marijuana businesses are also rapidly changing, so it's very important to understand current law and stay ahead of the curve. Contact a cannabis law attorney near you and learn about the latest laws in your specific jurisdiction.