icon on The Problem:
From an outsider’s perspective, the cannabis industry looks rosy. The state of Michigan is on pace to hit a record ‘high’ $3.2B in overall sales, highways are littered with cannabis billboards and many dispensaries still have lines out the door. The industry is massive. A small slice would fancy most entrepreneurs. But a closer examination of the industry reveals an underlying problem for even the largest operators – cash flow.
The ability to pay and pay on time is a compounding problem in the cannabis industry. This stems directly from the lack of traditional financing. Business loans and lines of credit provide cash elasticity. Put more simply, banks provide cash which allows manufacturers to get paid on delivery while simultaneously giving retailers time to sell the product. Banks act as the middleman and, in exchange, receive interest on the funds pushed into the industry. But remove banks and that elasticity and the end result? An ‘all cash’ industry that is, well … cash strapped. With no traditional financing, cannabis operators hold cash and stretch their payables. Retailers demand 30 – 45 days to pay wholesalers for goods received which then forces a cash crunch and the wholesaler’s ability to pay its debts. Which then impacts the vendors rendering services to the wholesaler. And so on and so forth. Historically, banks and credit unions have shied away from lending to cannabis companies. This is due, in part, to the potential liability stemming from the Anti-Money laundering and the Bank Secrecy Act which can carry personal and financial consequences if not closely adhered to. The risk simply isn’t worth the reward for most.
The Solution:
The SAFER Banking Act, if passed, would permit banks and other financial institutions to lend and provide capital directly to cannabis operators without fear of federal reprisal. Institutions must still perform their due diligence before working with cannabis operators and ensure the operators continue to adhere to state guidelines.
The Act would also provide a shield for individuals seeking a mortgage given that their income comes from cannabis operations. Insurers working in the space also gain increased protection from liability. Currently, insurance could be seen as providing financial services to a cannabis operators. Hemp operators may also find comfort in the Act as even the federally legal hemp producers find difficulty working with banks and credit unions given the close tie to cannabis. Finally, the risk of federal forfeiture would also disappear. Currently, assets derived from illegal operations (such as cannabis) are subject to federal forfeiture.
How Howard & Howard Can Assist:
As lawyers advising financial institutions, the SAFER Banking Act necessitates a risk-based approach when working with cannabis businesses. It's crucial to prepare for the nuances of providing services to these businesses, considering the complex interplay of state and federal laws. Financial institutions will need to navigate these waters carefully, balancing the opportunities presented by the Act with the need to comply with all applicable laws. Howard & Howard’s long-standing stature as a banking law firm make it uniquely equipped to deal with these nuances – whether you are currently working with cannabis operators or looking to do so in the future.
The passage of the SAFER Banking Act through the Senate Banking Committee marks a pivotal moment for the cannabis industry and its ancillary service providers. It signals a growing recognition of the industry's legitimacy and the need for a regulatory framework that accommodates the unique challenges it faces. As the Act moves toward a Senate floor vote, its implications for the legal and financial sectors are profound, promising a new era of safer, more accessible banking for cannabis businesses across the nation. Howard & Howard will be here along the way to help keep you updated.
For more information about the SAFER Banking Act, please contact Alexander Leonowicz.