By all accounts, cannabis and cannabis-related businesses can be lucrative—and the field of play is growing steadily. Already, 30 states and the District of Columbia have laws that broadly legalize marijuana in some form, and more states are considering similar legalization proposals. But while there is clearly money to be made, the players in this nascent industry face a huge hurdle: where to stash the cash they rake in.
The issue stems from reluctance on the part of financial institutions to work with businesses related to marijuana sales in any way—even when those businesses are located in states that have legalized cannabis. Whether you’re looking for startup capital, hoping to set up merchant processing so as to accept credit cards from your customers, seeking a way to pay your vendors by check or trying to deposit your profits into a savings account for the funds, if your business model involves selling or distributing cannabis—or even servicing a marijuana-related business—banks are likely to turn you away. Perhaps worse yet, if you already own a shop, deciding to dabble in cannabis may put your existing banking relationships in jeopardy.
Why, when so many states are looking so favorably on the cannabis industry (and the tax revenues that come with it), are banks refusing to play ball? Ostensibly the issue lies with the fact that a federal prohibition of the herb remains in place. Yet, the federal position on marijuana is rarely, if ever, enforced in states where legalization has taken place. “The rationale that the banks use is that they are subject to federal regulation, and since it is federally illegal, they could suffer penalties and be arrested if they work with cannabis-related companies,” explains Nathaniel Gurien, a consultant to the cannabis industry and founder of Orion Group.
Essentially, most banks view marijuana businesses as “insufficiently legal,” meaning that the risk of running afoul of regulators outweighs the potential upside of working with cannabis businesses. The position is particularly prevalent among larger banks, which have more business at stake and sometimes have a presence in multiple states—some of which may not yet have proven to be receptive to cannabis. Compounding the issue is the fact that many of the nation’s cannabis businesses are relatively young, tending to be smaller startups that have yet to reach the size and scope necessary to be considered sought-after clients by the banking industry.
Gurien is skeptical of the banks’ stated reasons for refusing to work with those in the cannabis industry, pointing out that other regulated entities, such as utilities, have no issue with providing business owners in the category with services like heat, electricity, and phone and Internet service. Banks, however, are potentially subject to more stringent restrictions due to the fact that money obtained through illicit activities can be construed as money laundering under the Comprehensive Drug Abuse Prevention and Control Act of 1970.
Still, Gurien suspects that banks have a more subjective rationale for avoiding cannabis. “They just don’t like the industry,” he says. “They think of it as dirty and disreputable, like porn. That’s the real reason.”
Cash Isn’t King
Whatever the true rationale, 70 percent of “plant-touching businesses” and 49 percent of marijuana industry support service providers lack bank accounts, according to Marijuana Business Daily. And that lack of access to financial services is problematic. As it turns out, the old mantra “cash is king” is a mixed bag when you’re trying to run a legitimate business. “I literally had to stash profits from my business in garbage bags in my basement,” one retailer told Tobacco Business. “There just wasn’t anywhere else to put it. And it’s actually hard to do business in cash. Sure, some people prefer it, but when you go to hire a reputable accountant, lawyer or other professional, cash can make them uncomfortable. It’s like a red flag.”
Businesses taking in lots of cash and with nowhere to park it also tend to attract unwanted attention. Already, according to the Los Angeles Times, cannabis business owners have been burglarized, kidnapped and robbed at gunpoint by criminals who are well-versed in sniffing out hordes of cash.
Where does that leave cannabis businesses? Fortunately, there are banks and financial services organizations willing to take on leaf-based businesses, notes Gurien, whose startup company, Fincann.com, is one of them. “It is picking up,” he says. “The banks are noticing two things. One, a lot of their existing good business customers are accepting marijuana businesses as clients: guys selling soil, greenhouses, attorneys, branding companies, advertising agencies—and some of them in a big way. So you could start losing customers if a firm that’s been doing business with you decides to branch out. And then there are the potential customers—fast-growth businesses—that you’re sacrificing.”
Gurien urges business owners to resist the urge to cloak their dealings in secrecy in order to get a banking relationship. “Being transparent and forthcoming is the best policy and the best way to have your business sustained over the long haul,” he says. “If you have an existing business and a banking relationship, I would recommend keeping that and opening an account with a bank like mine for the portion of your business that is for cannabis. Then you can report to your bank, ‘Look, my cannabis money goes over here, so don’t worry.’”
Another option is to seek out companies that offer banking solutions tailored to this type of issue. “There are companies that offer merchant services, credit card processing, plus bank accounts as a package,” he explains. However, be sure to ask for references and vet your options carefully. Fees can be high and reliability can be low, with false decline rates on credit card purchases rampant. “It’s almost like having really bad telephone service—not worth having at all,” says Gurien.
Fortunately, the tide is starting to turn—albeit at a glacial pace. The number of banks working with the cannabis industry nationwide rose from 15 in 2014 to 311 by the end of 2016. Credit unions and smaller, local banks in states where marijuana has been legalized tend to be the first to shift their stance on working with cannabis entrepreneurs, says Gurien, whose company is working on a building a network of cannabis-friendly financial institutions. “We’re building a website to help address this problem,” he says. “Our goal is to get to a point where business owners can push a button and connect with a bank willing to serve them.”
This story first appeared in the May/June 2018 issue of Tobacco Business magazine. Members of the tobacco industry are eligible for a complimentary subscription to our magazine. Click here for details.
– Story by Jennifer Gelfand, editor in chief of Tobacco Business Magazine