Blog post by Harris Beach about cannabis banking and predatory lending.

Managing Risk and Predatory Lending in Cannabis Banking

by Bartholomew Chacchia of Harris Beach

This guest column was written by Harris Beach, a CANY sponsor that provides a full range of legal and professional services for clients across New York state. More about them here.

If you’re interested in becoming a CANY sponsor, go here to learn more.

In a world where cannabis is legalized by states while still illegal at the federal level, providing financial support to legal cannabis-related businesses remains a significant risk for financial institutions and private investors.

Banks are subject to federal laws, and therefore must consider significant legal implications to providing financial services to state-licensed cannabis businesses since marijuana is still classified as a Schedule I drug under federal law. This tension between state legalization of cannabis and federal law has kept many financial services companies from engaging with the cannabis industry, forcing cannabis businesses to operate mostly on a cash basis or use alternative financial providers that often expect high yields due to the risk involved.

Harris Beach attorney Bartholomew Chacchia, who counsels cannabis businesses on a range of business matters, both strategic and transactional, said because cannabis is illegal under federal law, any investment a New York bank or financer makes in a cannabis company will be technically illegal under federal law, and the accompanying, albeit theoretical, risk of criminal prosecution and asset forfeiture will remain a consideration for those banks and financers so long as the federal law endures.

High risk investments can lead to predatory loan practices, such as unreasonable yields well above the prime rate or irrational loan-to-own provisions.

But many of the practical risks of cannabis investments can be reduced and managed. Some solid risk management tips include:

  • Researching lending options: Read reviews of multiple lender prospects from reliable sources, ask questions of the lenders and any of their existing borrowers you may know, and avoid dealing with any lending prospect that is proposing terms wildly inconsistent with the competition. Given the lending risk, expect to pay more than the prime rate and provide collateral above and beyond the business assets to secure the loan, but don’t fall prey to predators (aka ‘loan sharks’) requiring ridiculously high rates and/or other unreasonable terms.
  • Filing applications and disclosures: Be thorough, truthful and transparent – be prepared to answer questions, provide concrete data that supports the viability of your business, and certify that you comply with all applicable regulations. Seek the advice of legal counsel on the disclosure of any proprietary, confidential or otherwise sensitive information.

While obtaining a term loan, small business loan, equipment loan, business line of credit or alternative financing is more difficult in the cannabis industry, it is not impossible. However, cannabis companies need to take extra precaution to manage their debt and protect themselves from predatory lenders in order to mitigate significant business risks.

Interested in learning more about predatory lending and managing risk?

Check out the Cannabis Banking and Predatory Lending webinar that the CANY NYC Committee hosted on 5/11/23. Watch it here!