Cashed Out: Securing a loan in the cannabis industry is like having bad credit.
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With federal law banning cannabis, companies struggle 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, D.C. to lobby lawmakers to pass a cannabis banking bill. Because weed is still banned under federal law, only a small portion of the country’s FDIC-insured banks are willing to service cannabis companies operating legally under state law.
This week’s lobbying day, hosted by the National Cannabis Industry Association, was an effort to push 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 breaking federal law. The bill has passed the House seven times but is unable to make it through the Senate.
Because of the federal impediment, major credit card companies don’t service the industry, which means most transactions at state-legal marijuana stores are in cash. And for businesses looking to get a loan, typical resources like the Small Business Administration’s low-interest loans are unavailable. Alternative lenders willing to take the risk have filled the void, but most offer sky-high interest rates.
Some lenders offer loan-shark 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 Los Angeles-based fintech company Bespoke Financial is using 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 the agriculture financing company Produce Pay, Bespoke has financed more than $1 billion in the space.
“The industry shouldn’t have to wait until federal legalization to access capital,” says Mancheril, Bespoke’s CEO. “At the end of the day, lending is lending.”
Duncan Ley, who cofounded California Street Cannabis, a two-store dispensary chain in San Francisco, also owns two bars. He has no problems getting lines of credit for his watering holes, California Jack’s and Teeth. He uses online lender Blue Vine to take out lines of credit when needed. But banks and alternative lenders like Blue Vine, Cabbage and Square do not work with marijuana companies.
“I know what it’s like to run a business that is highly controlled but federally legal,” Ley says. “But that’s not the case for cannabis.”
If payments are 15 to 29 days late, the interest rate rockets to 50%. Thirty days or more, and the rate jumps to 100%.
Thanks to the combination of California’s broken economic model and 280e, the federal tax code companies that sell cannabis must pay under, it’s hard to run a profitable business. “There’s no room for error,” says Ley. So he uses Bespoke’s credit line to pay for inventory upon delivery, which helps him get a better price. “I pay 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 he’s being taken advantage of to a certain degree. The company credit card he uses for his bars has a 14% annual percentage rate, while Bespoke offers the equivalent of a 20% APR. Still, Bespoke’s rates “are pretty darn good considering it’s cannabis,” explains Ley, who has been quoted close to 30% APR from other lenders, some of whom wanted the loan to be secured by his personal real estate. Bespoke, which has raised $8 million in equity from venture firms like Casa Verde Sweat Equity Ventures, Greenhouse Capital Partners and a $125 million credit facility from an unnamed institutional investor, secures its loans with a debitor’s inventory.
That interest rate is calculated daily—at 0.05367%. If it were annualized, it would hit nearly 20% APR. But the loans are 60-day terms and if they are not paid within that time frame the hooks do set in. If a debtor is 1 to 14 days late, the interest rate shoots up to 25%. If payments are 15 to 29 days late, the interest rate rockets 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 shitty credit card,” Ley explains, “which can be dangerous for any teenager or junky but when used responsibly is a valuable tool to help us manage cash flow.” 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 service the cannabis industry. (There were 4,200 FDIC-insured banks across the country in 2021.) Out of 755 banks, Dan Roda, the cofounder 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, weed companies are happy to pay for the privilege of having cash flow, just like anyone with bad credit is grateful to have a card with 24% APR.
Roda says there is a good reason financial institutions and lenders willing to do business in the industry have higher rates for marijuana companies. “There is a very real risk attendant to lending money to a business that is still operating in violation of federal law,” he says. “And that 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 at Snoop Dogg’s Casa Verde Capital, a $300 million VC fund focused on the cannabis industry, says most debit financing in the sector is only available to large companies operating across multiple states. “There’s a whole segment which has not been able to access [debt] as easily,” says Wadhera. Casa Verde is Bespoke’s largest investor. Bespoke’s rates are high, but Wadhera says they are “fairly in line” with the industry standard. “It will certainly improve as the industry is able to achieve lower cost of financing,” he says.
But what happens to these types of lenders if the SAFE Banking Act is eventually passed, or there’s greater reform at the federal level? “Any form of legalization, de-scheduling or allowing financial institutions to work with cannabis in a broader way,” Mancheril says, “and we’re in a position to really help capture a lot of that momentum.”
In the meantime, it’s safe to say that without SAFE Banking, lenders will keep interest rates for cannabis companies as high as they’d like.
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