Here’s what cannabis businesses can do to make the most out of the current financial landscape.
Companies in the cannabis industry looking to start a relationship with federal banks and credit cards are going to have to wait a little longer. Despite bipartisan support, the Secure and Fair Enforcement (SAFE) Banking Act has stalled in the Senate; caught in minor disagreements, it has missed the opportunity for a vote during the summer session, leaving cannabis-related companies caught in financial limbo. Unfortunately, this isn’t new news: the first version of this bill was introduced to congress 10 years ago.
Politically, the main selling point is that the bill would boost the safety of the cash-heavy industry: Politicians point to an increased number of break-ins at dispensaries as a justification for allowing federal financial institutions to provide services such as bank accounts and credit card transactions to cannabis companies.
An easy political sell, the public safety angle – spelled out in the acronym SAFE – is usually the first (and only) benefit mentioned in the news. Yes, SAFE would allow dispensaries to shift away from cash transactions by permitting credit card companies to service businesses that produce, manufacture, distribute and sell cannabis, despite the fact it is a schedule 1 controlled substance.
But beyond preventing robberies, the bill would start to level the economic playing field for this growing industry that already faces an extremely high rate of federal taxation, on top of other disadvantages, such as higher transaction and banking costs that lead to pricing pressure – and make it tougher to compete with the illicit market.
Because of cannabis’ schedule 1 status, nationwide banks are not allowed to provide any services whatsoever to cannabis-related businesses. Even though the businesses are legal at the state level, national banks operate under a federal charter that prohibits such relationships – not just with dispensaries, anyone who does business with the cannabis industry – web designers, lawyers, marketers, etc.
(I learned that the hard way when, in the early days of working as a virtual CFO for cannabis companies, I had all of my Bank of America accounts – personal and business – frozen and shut down abruptly.)
Since federal banks cannot provide small business loans or even issue checking or savings accounts, cannabis-related businesses are limited to small banks (i.e. credit unions, state banks). They face higher borrowing costs, and receive lower interest rates, cutting them off from many of the privileges other industries enjoy. Best financial practices – like securing a line of credit or keeping operating cash in an interest-bearing account – may seem out of reach.
For cannabis-related companies that had been impatient to take advantage of this new legislation, the news is frustrating to say the least.
But there are lots of ways retailers can work within the current financial landscape. Here’s what I recommend.
- Seek an interest-bearing account – The smaller banks and credit unions servicing the cannabis industry typically do not offer these clients interest-bearing products. However, it is possible to find interest-bearing accounts for operating cash, for example through the fintech company Safe Harbor Financial, with rates starting around 1.5%.
- Secure a line of credit – With loans hard to come by, cannabis companies often feel as though they have to access capital from private investors, forcing them to give up equity. But seeking non-dilutive funding is possible – and recommended – once you’ve established your target operating cash balance of 10-30% of annual revenue.
Many cannabis friendly banks will offer unsecured lines of credit at rates of base rate +4% – but generally only in limited license states.
Note: although rates can be competitive in some cases, the amounts tend to be lower. However, since these facilities are often based on an amount per tax ID, multiple entities could each carry their own line of credit and increase total borrowing capacity.
- Facilitate compliant debit sales – We know cash-only can drive down retail sales and increase risk of theft or employee mismanagement. With credit cards unavailable, two popular, but non-compliant, solutions have been cashless ATMs and Mastercard and Visa debit cards. While cashless ATMs experienced a crackdown last December, the latest news suggests that Mastercard is also cutting off this popular work-around.
Rather than get caught up in the headlines, adopt compliant pin-based debit cards, through products such as Aeropay. Unlike traditional debit card transactions, customers will have a fee, and they’ll also have to set up a specific app to gain access, but as all other cashless options appear to be erased, the benefits outweigh the costs, especially for regulars.
Just make sure you’ve got a point of sale (POS) system with flexibility in terms of their API (application programming interface) – for example Flowhub – so that you can integrate the pin-based debit card payment method.
- Don’t pay monthly banking fees – While most banking institutions charge account fees to cannabis businesses, with a little research you can find some that waive those fees, for example Main Street Bank and Safe Harbor Financial.
- Keep deposits safe – Although the dust has settled since the collapse of Silicon Valley Bank, cannabis businesses should still keep an eye on managing their banking risk. Since programs like CDARS and ICS are not available to the industry, we recommend cannabis operators keep deposits at multiple banks to keep the highest possible FDIC insured balance.
Despite these financial obstacles and policy roadblocks, the cannabis industry continues to grow, year after year. Accessible banking products are out there – and as we wait for more federal legislative progress, it can be well worth the investment to do a little research to find out which ones best meet your businesses’ needs.