Navigating the Complexities of Cannabis Capital

By Sundie Seefried

Navigating the complexities of cannabis capital remains a daunting task for entrepreneurs amidst the rapid growth and increasing acceptance of the industry. Despite its expansion, businesses encounter significant hurdles in accessing traditional sources of capital due to the regulatory landscape’s complexity, characterized by varying state laws and evolving compliance requirements. This adds layers of financial intricacies, compelling cannabis operators to seek alternative financing avenues like private equity, venture capital and innovative debt structures to drive expansion and navigate the financial terrain effectively.

Rising Rates, Access to Capital and Regulatory Reforms

The relationship between rising interest rates and access to capital is significant, particularly in cannabis. As interest rates increase or remain high, the cost of borrowing increases, making it more expensive for businesses to obtain financing for expansion, operations and capital investments. Costly access to capital is exacerbated in a rising rate environment, where lenders are more cautious and may impose stricter lending criteria. Rising rates make debt more difficult and expensive to service for businesses, often narrowing the pool of qualified borrowers. While any form of the SAFE or SAFER Banking Acts may not directly impact the rising rate environment or access to capital, rescheduling cannabis could. In fact, rescheduling could potentially lead to greater normalization of the cannabis industry in the eyes of lenders, resulting in improved access to capital and more favorable borrowing terms.

The Dynamics of Rescheduling

With increasing recognition of cannabis’s therapeutic or medicinal benefits and the momentum behind legalization efforts, the debate over its federal classification in the U.S. has intensified. Rescheduling cannabis holds the potential to significantly enhance access to capital for cannabis businesses by facilitating entry into traditional banking services and investment avenues, thereby fostering more robust and stable growth within the sector. Currently labeled as a Schedule I substance under the Controlled Substances Act (CSA), cannabis faces stringent limitations on usage and research. Rescheduling also promises to alleviate these constraints, streamlining the process for cannabis businesses to secure vital financial resources such as loans and lines of credit and potential grants. This increased financial accessibility could empower cannabis enterprises to expand their operations, invest in research and development and better navigate the industry’s intricacies. However, it’s important to note that while rescheduling may alleviate some financial barriers, it may not directly impact the pricing dynamics of cannabis products. Factors such as market supply and demand, evolving regulatory landscapes and competitive market forces will continue to exert influence. Speculation suggests that rescheduling to a lower schedule, such as Schedule III, could further catalyze investments and unlock new avenues for medical research and application. While Schedule III drugs like testosterone, anabolic steroids and Tylenol with less than 90 milligrams of codeine per dose are not fully mainstream products, they certainly don’t operate under the regulatory control and scrutiny of a Schedule I drug. This potential shift could mark a pivotal moment for the industry, potentially paving the way for broader federal legalization and fostering a more conducive regulatory environment.

Preparing for Regulatory Changes on the Horizon

Preparing for regulatory reforms and greater access to financial services involves several key steps for businesses in the cannabis industry. First, it’s essential to establish and formalize accounting practices and financial statements. This includes maintaining accurate records of revenue, expenses and other financial transactions, as well as preparing financial statements in accordance with generally accepted accounting principles (GAAP). Well-organized financial records demonstrate financial stability and compliance with regulations, which are crucial when seeking financial services. Additionally, businesses should consider establishing relationships with smaller banks and credit unions that are more willing to work with cannabis businesses. Building these relationships early can expedite access to banking services once rescheduling occurs or the SAFE or SAFER Banking Act passes. Lastly, staying informed about changes in regulations and banking policies related to cannabis ensures readiness to capitalize on greater access to banking services when available.

Navigating Commercial Lending

Navigating commercial lending in the cannabis industry requires careful consideration of its unique challenges and nuances. It’s crucial for cannabis businesses to maintain strict compliance with state and federal regulations when seeking commercial lending, mitigating risks for lenders. Additionally, demonstrating a strong financial track record and the ability to meet financial obligations is essential. Detailed financial documentation, including cash flow projections, balance sheets and income statements, should be prepared and ready to present to lenders.

Establishing and building relationships with lenders who are familiar with the cannabis industry can provide a strategic advantage, as they possess a deeper understanding of its specific needs and challenges. Overall, maintaining compliance and financial stability are key to successfully navigating any commercial lending space in the cannabis industry.

Financial institutions, unlike investors or venture capitalists, rely more on the borrowers ability to meet debt servicing obligations than on future projections.  In other words, you have to afford the payment presently. Certainly, future projections are considered in the strength of the borrower and meeting those projections opens the window for additional financing, but the cost of capital is usually lower at a financial institution because the risk appetite is usually much lower than that of an investor.