Banking in Cannabis: The Other US Banking Crisis

What does Silicon Valley Bank and banking uncertainty have to do with cannabis? Only that to the cannabis industry banking uncertainty is old news. The SVB closure brought national attention to the banking industry and the expectation of reliable credit for businesses, new and old. For cannabis entrepreneurs this expectation of commercial banking, a necessity for any business, is hard to find on any day. A run in a friendly bank and the hardship the results, is an everyday experience for cannabis business operators, except they don’t need a run on their bank to lose access to their finds, there simply is no bank for most cannabis businesses. The cannabis industry lives in a world where access to a bank is difficult and commercial lending nearly impossible. Even the largest MSOs have trouble raising funds and in the current high interest rate environment, this has become even harder. For the most part, only private capital is available to support this rapid growth industry targeted to reach $60 billion in sales.

Hundreds of licensed and regulated businesses do not have access to the banking industry. That means they can’t accept credit cards, deposit the money they take in from sales of products, revenues, obtain a loan, or even write checks to meet payroll or pay taxes. This restriction is a direct result of the continued Schedule 1 designation of cannabis under the Controlled Substances Act a status that is as out of date as it is unfair to a thriving industry. You may recall that cannabis sales were considered essential services in many states during the Covid 19 pandemic, and yet these businesses are denied access to the US Banking system. No industry can operate that way. Safe access to funds and availability of expansion and support capital are essential to any business.

When interest rates were low and private capital plentiful, well positioned cannabis businesses took on private debt that was used for operations and expansion, a service usually provided by a bank. As these low-cost loans come due, the cost to refinance doubled or tripled under the current interest rate environment. Private debt is often more costly than commercial/bank debt so the industry is getting slammed.

The failure of Congress to pass the SAFE Banking Act last year makes the situation even worse. Sure there are a few banks that service the industry but their fees are high and resources low. Congress surely must get serious about the Safe Banking Act and more broadly the Cannabis Administration and Tax Act introduced by Senators Schumer, Wyden and Booker last year Booker, Schumer, Wyden Introduce Cannabis Administration and Opportunity Act. Until then this growth industry cannot engage in normal finance similar to every other business in America and for that matter worldwide.

Not all of the news is bad though. Private sources of capital can still service the industry and do so and there are abundant private equity sources available with cash for new startups and seasoned businesses. Also legal hemp products can work within the existing banking structure. Since Industrial Hemp is delisted from Schedule 1 of the CSA, it is a legal commercial product and can have regular banking relationships. Even then, though, some banks remain reluctant to lend to hemp entrepreneurs. Their lack of understanding of the business and false equivalencies with THC cannabis make some bankers reluctant.

Silicon Valley Bank took a chance on startup technology businesses and both it and they flourished. Bad management and lenient bank rules led to its collapse, but that doesn’t mean it did not serve a vital role in helping the tech industry get off the ground. Cannabis, both THC and hemp would benefit from more industry-friendly banks and regular banking services. This is the most crucial cannabis industry necessity for 2023.

How This Affects Cannabis Businesses

Whether you’re a cannabis entrepreneur, an established cannabis business, or not in cannabis at all, the banking crisis has a profound effect on the economy and future growth. What is needed is banking reform, something that will drive deposits to community banks (and SVB was a community bank) with a mandate that those banks devote a certain amount of their capital and loan portfolios to credit worthy new businesses. With uncertainty in community banks owing to the current banking crisis, deposits will flow to the very largest banks, with vast loan bureaucracies and discretion that often means they won’t lend to small businesses. Even the process of opening a new business account at a large bank can be centralized remotely from where the business is located with little, if any, local knowledge, understanding or support.

Banks already have an obligation to invest in their own communities, see The Community Reinvestment Act, Community Reinvestment Act (CRA) – Federal Reserve Board so why not also require attention to small and startup businesses? That’s what SVB did for the tech industry, let’s do that also for cannabis. 

And, while Congress considers banking reform, which it most assuredly will with SVB, Signature, First Republic and a few other banks on the bubble, let’s get them to pay attention to the credit needs of a $60 billion industry that can’t even get a loan due to the provenly stupid scheduling of cannabis as a Schedule 1 drug under the CSA. As a Schedule 1 drug, cannabis is treated the same as heroin and LSD, and even LSD is getting a new look as psychedelic medicine useful in the treatment of some mental disorders. With cannabis legal in some fashion in nearly 40 states and growing list of countries, the economy of this industry benefits the general economy.

What Can Cannabis Businesses Do?

  • Don’t give up on your local community bank. Keep your deposits there. 
  • Get to know your local bankers and be sure they understand your business. 
  • Send referrals for new accounts to your local bank. They’ll appreciate it and recognize your support next time you need help from them. 
  • Invest in the bank and get on its board or advisory board. 
  • Follow state and federal legislation and write to your representatives. Tell them that you want access to local community banks that will invest in and issue debt to local and startup businesses. While you’re at it, tell them to support and pass the Safe Banking Act 

This list applies to any business, whether a cannabis enterprise or otherwise. As we said at the beginning of this post, the uncertainty hanging over the entire economy with the closing of Silicon Valley Bank only makes the plight of cannabis entrepreneurs untestable to everyone else. The impact of a weakened banking system, the insecurity of business credit, and the flight to the “safety” of the largest banks, undercuts the entire credit system, and especially the latter will have the tendency to push smaller and startup businesses further down the ladder of success.

Scroll to Top