For the cannabis industry, loans are short and interest rates high
With the federal law prohibiting cannabis, businesses are struggling to access the banking system. So the price of doing business is double digit interest rates.
On Wednesday, dozens of marijuana business leaders flew to Washington, DC to lobby lawmakers to pass a cannabis banking bill. Because weed is still prohibited under federal law, only a small portion of FDIC-insured banks nationwide are willing to service cannabis companies that operate legally under state law.
This week’s lobby day, organized by the National Cannabis Industry Association, was aimed at pushing the Senate to pass the Secure and Fair Enforcement Banking Act (SAFE), which would allow financial institutions to do business with cannabis companies without fear of abuse. violate federal law. . The bill passed the House seven times but failed to pass the Senate.
Due to the federal hurdle, major credit card companies do not service the industry, meaning most transactions at legal marijuana stores are cash. And for businesses looking to secure a loan, typical resources such as the Small Business Administration’s low-interest loans aren’t available. Alternative lenders willing to take the risk have filled the void, but most are offering exorbitant interest rates.
Some lenders offer usurious interest rates of 40%. These lenders secure their loans, with payments due weekly, using a company’s real estate or cannabis licenses as collateral. But Bespoke Financial, a Los Angeles-based fintech company, uses the Goldilocks principle. Bespoke’s short-term loans offer high, but not astronomical, interest rates to cannabis dispensaries. Founded in 2018 by George Mancheril, a former debt investor at Guggenheim Partners, and Ben Dusastre and Pablo Borquez Schwarzbeck, who founded agricultural finance firm Produce Pay, Bespoke has funded over $1 billion in the space.
“The industry shouldn’t have to wait for federal legalization to access capital,” said Mancheril, CEO of Bespoke. “Ultimately, lending is lending.”
Duncan Ley, who co-founded California Street Cannabis, a two-store dispensary chain in San Francisco, also owns two bars. He has no problem getting lines of credit for his watering holes, California Jack’s and Teeth. He uses online lender Blue Vine to get lines of credit when needed. But banks and alternative lenders like Blue Vine, Cabbage, and Square don’t work with marijuana companies.
“I know what it’s like to run a highly regulated but federally legal business,” says Ley. “But that’s not the case for cannabis.”
If payments are 15 to 29 days late, the interest rate jumps to 50%. Thirty days or more, and the rate jumps to 100%.
Thanks to the combination of California’s broken business model and the 280th federal tax code businesses that sell cannabis have to pay, it’s difficult to run a profitable business. “There’s no room for error,” says Ley. So he uses Bespoke’s line of credit to pay for inventory on delivery, which allows him to get a better price. “I’m paying a few points on that,” he says, “but it’s a reasonable number to give me that flexibility to better manage my cash flow.”
Ley also knows that he is exploited to some degree. The company credit card he uses for his bars has an APR of 14%, while Bespoke offers the equivalent of an APR of 20%. Still, Bespoke’s rates “are pretty darn good considering the cannabis,” says Ley, who was quoted nearly 30% APR by other lenders, some of whom wanted the loan secured by his personal real estate. Bespoke, which has raised $8m in equity from venture capital firms like Casa Verde Sweat Equity Ventures, Greenhouse Capital Partners and a $125m credit facility from an anonymous institutional investor, is securing its loans with a debtor’s inventory.
This interest rate is calculated daily at 0.05367%. If annualized, it would reach almost 20% APR. But the loans have a term of 60 days and if they are not paid within that time, the hooks set in. If a debtor is 1 to 14 days late, the interest rate goes up to 25%. If payments are 15 to 29 days late, the interest rate jumps to 50%. Thirty days or more, and the rate jumps to 100%. In other words, no one in the cannabis industry can afford to be late.
“It’s basically like a crappy credit card,” says Ley, “which can be dangerous for any teenager or junkie, but when used responsibly, it’s an invaluable tool to help us manage flows. cash.” To put these rates into context, if cannabis retailers could access SBA loans, the rates would be around 6%.
According to the Financial Crimes Enforcement Network, only 755 banks serve the cannabis industry. (There were 4,200 FDIC-insured banks across the country in 2021.) Of 755 banks, Dan Roda, the co-founder of Arkansas-based Abaca, a fintech startup that helps marijuana companies maintain compliant banking and payment solutions, estimates that only 1% offer lines of credit to the industry. In this environment, cannabis businesses are happy to pay for the privilege of having cash, just as anyone with bad credit is grateful to have a card with 24% APR.
Roda says there’s a good reason financial institutions and lenders willing to do business in the industry have higher rates for marijuana businesses. “There is a very real risk involved in lending money to a business that continues to operate in violation of federal law,” he says. “And this risk does not appear in any other industry.”
Roda adds that high interest rates will remain until federal law changes. Karan Wadhera, the managing partner of Snoop Dogg’s Casa Verde Capital, a $300 million venture capital fund focused on the cannabis industry, says most debt financing in the sector is only available for large companies operating in multiple states. “There is a whole segment that has not been able to access [debt] so easily,” says Wadhera. Casa Verde is Bespoke’s largest investor. Bespoke rates are high, but Wadhera says they’re “fairly consistent” with the industry standard. “It will certainly improve as the industry is able to reduce its funding costs,” he says.
But what will happen to these types of lenders if the SAFE Banking Act is finally passed, or if there is greater reform at the federal level? “Any form of legalization, de-scaling, or allowing financial institutions to work with cannabis more broadly,” Mancheril says, “and we’re able to really help capture a lot of that momentum.”
In the meantime, it’s safe to say that without SAFE Banking, lenders will keep cannabis company interest rates as high as they want.