Managing finances in any business comes with its challenges. But if you’re in the cannabis industry, small business financing can be even harder to secure: Because of tricky regulations associated with this industry, most dealings have to be made in cash. Although many business owners in the cannabis industry have found workarounds, there is still a lot of confusion about staying compliant.
Believe it or not, you do have better options than stashing cash under your mattress. It all starts with understanding the basics of the legal framework you’re working within and knowing the businesses that have arisen to solve your specific financing problems.
Just like with other types of businesses, your options for starting a weed business are debt financing and equity financing. Most of your options are from alternative lenders, venture capital firms that specialize in cannabis investments, and niche companies that have created platforms designed to solve cannabis industry-specific problems.
Here’s what you need to know about securing and managing financing for a cannabis business, while remaining aboveboard.
The Legal Challenge of Financing Cannabis Businesses
The root of the issue with financing a cannabis business is in the complexity of the legal system.
As a refresher, marijuana is not legal at the federal level, but it is legally approved for recreational use in nine states and Washington, D.C., and widely decriminalized in many others. This trend toward decriminalization means the market is prime for those looking to start marijuana businesses. However, challenges do still arise from the fact that the federal government hasn’t given marijuana the green light.
Is Bank Financing Possible?
For the most part, probably not. All major banks are regulated by the federal government—and since the federal government sees transactions related to cannabis as criminal activity, federally chartered banks can’t touch any weed money.
Even the arguments that the money is for operations or personal use won’t stand. This is because technically, the bank is subject to money laundering laws. And if a bank is caught money laundering, they’ll be subject to heavy penalties.
The legalities around money laundering are complex. Practically, though, this means that your local Chase, Wells Fargo, Citi Bank, or other major branch won’t open any accounts for you if you’re in the cannabis business. You won’t be able to take out loans, credit cards, or any other financial products through these institutions, either.
Find the “Loophole”
If you’re starting a cannabis business, you won’t be able to secure financing with any of the heavy hitters—but that doesn’t necessarily mean that every bank is off the table. Braden Perry, a regulatory attorney who specializes in emerging regulatory issues, including those related to cannabis, says:
“The key to high-risk areas and banking relationships is to have a strong compliance program and transparency. Independent compliance audits of the company, either by a third party or someone not actively involved in your compliance management system, will add to the trust the bank has with the company.”
Perry also suggests checking out local and state-chartered banks and community credit unions. These financial institutions tend to be more comfortable working with businesses that operate in the cannabis industry than large national branches.
But it’s worth noting that all banks, even the smaller ones, are beholden to federal regulation through the Bank Secrecy Act. Under this law, banks are required to flag any transactions of $5,000 or more that may be associated with illegal activity. Since cannabis is federally illegal, it falls under this clause.
It’s important to understand that all banks, not just the major ones, take risks when they handle marijuana money. Because of this, there’s no guarantee that any financial institution will open an account for you or offer you other financing products like loans and credit cards.
Alternative Options for Cannabis Business Financing
Now that we’ve told you everything you can’t do to finance your marijuana business, let’s get into your options.
To reiterate, you can approach banks for accounts, loans, credit cards, or other needs, but generally only state or local institutions will accept you (if at all). If you find that even your local bank or credit union turns down your financing application, know that a bunch of alternative options have arisen to meet cannabis business owners’ needs.
Alternatives are not always ideal, since they tend to be less stable than banks. But because these platforms aren’t regulated by the federal government or FDIC-insured, they’re not obligated to follow the same laws as banks.
As with any business, the financing option that’s best for you depends largely on the growth stage you’re in. Luckily, there are a few options for most needs you may have:
Funding with equity is relatively hot right now, as cannabis is seen as an emerging industry. As a reminder, there are three main ways to get equity funding: angel investors, venture capital firms, and crowdfunding.
There are a handful of venture capital firms that focus specifically on cannabis startups, including Snoop Dogg’s Casa Verde Capital. If you’re beyond the seed funding stage, then these firms can be worth a try. New Cannabis Ventures has a list of VCs, and a quick Google search can also turn up some results, too.
Just like there are plenty of VC firms looking to invest, cannabis has peaked the interest of angel investors, too. To find your angel, you can start by checking out AngelList, which actually has a section dedicated to helping startups find angels who are interested in investing in marijuana. An offline option is to try tapping your network or any angels you may have previously worked with to see if they can point you in the right direction. Cannabis industry conventions and meetups also exist, and it never hurts to attend some and see who you connect with.
Crowdfunding has recently arisen as a popular option for funding startups. The two most well-known platforms are Indiegogo and Kickstarter. Indiegogo, for one, has approved some cannabis companies to raise funds on their platform. StartEngine, a lesser-known platform, has also approved weed startups. Finally, there are a couple marijuana-specific platforms, including CannaFundr and Fundanna.
Funding with debt—either by taking out loans or using business credit cards—can get a bit trickier than equity funding due to those federal regulations. But the rise of alternative lenders and financial platforms has enabled cannabis businesses to secure the funding they need. Here are a few of your options.
While many traditional financing institutions aren’t willing to work with cannabis businesses, there are online lenders that are. Kabbage, Fast Capital, and United Capital Source, for example, are all open to funding marijuana businesses.
Online lenders tend to offer short-term options such as working capital or lines of credit with a quick turnaround. But keep in mind while searching that not all online lenders are willing to associate with the industry, so be sure to shop around and ask. Also note that these lenders don’t give out credit cards.
Some literature suggests that you can use credit cards to fund your business, though this can venture into some gray areas. You likely won’t be able to take out a business credit card for your cannabis business, due to the banking problem discussed earlier. And you might be able to use a personal credit card, but any transactions related to your business will technically be illegal, and there could be repercussions.
So, credit is likely out of the picture. But there is a special debit system, available through CanPay, which allows businesses to accept debit payments from consumers who also use the platform.
Because CanPay is separate from the banking system, debit transactions are allowed. Be aware, though, that because CanPay isn’t regulated by the federal government, there are no guarantees about the security of your money. Still, using a debit system might prove to be more secure than handling cash.
Point of Sale Systems
If you’re in the market for a POS system to manage and accept payments at your cannabis business, you have a few special options. The main advantages of using cannabis-specific services is that they can help you stay compliant, since they’re built with the specific legalities of the industry in mind.
First look into Green Bits, which helps you manage all aspects of the sales process. This platform includes state law integration so you can be sure you’re staying compliant, integration with other apps, and capabilities that let you easily manage your customer base.
For growers, distributors, and processors, LeafLogix can help you manage your day-to-day finances. This platform allows businesses to manage all points of the process, from cultivation, to distribution, to ecommerce, to point of sale. No matter which part of the supply chain you handle, LeafLogix probably has the capabilities to help you manage and track your daily operations.
The Bottom Line on Cannabis Financing: Do Your Research
As lucrative as the cannabis business can be, managing finances within the industry is tricky. Most of the money flow is regulated by the federal government, leaving business owners with few options outside of cash.
The good news is that some startups and local institutions have risen to the occasion to meet cannabis business owners’ needs. Just be sure to do your due diligence on any new method you’re thinking about—and fully understand the risks involved—before diving in.