Cannabis is a $30+ billion industry in the US today, with more than three-quarters of the population living in a state that has legalized some form of marijuana. However, cannabis remains a Schedule 1 controlled substance at the federal level, which has created both financial and operational challenges for cannabis-related businesses (CRBs).
Lack of access to financial services
Since cannabis is still illegal at a federal level, banks, financial institutions, credit card companies, payment processors and other companies can’t or won’t work with CRBs, due to the regulatory risks involved. This means CRBs can’t accept credit cards, open business deposit accounts, get traditional loans, or obtain other financial services that most businesses depend on to operate. The industry must instead deal primarily in cash, which is inconvenient to customers, expensive and inefficient for operations, and potentially dangerous.
Higher operational costs
According to MJBizDaily, CRBs have three to four times higher operating and financing costs than businesses in other industries. In fact, the estimated cost of starting up a new cannabis retail, cultivation or manufacturing facility has increased over the past decade from $200,000 to over $5 million. This is due to factors such as meeting regulatory requirements, complex supply-chain management (where you are not always permitted to transport product between states), and lack of negotiating power.
Section 280E of the IRS Code prohibits businesses engaged in trafficking controlled substances (such as cannabis) from deducting typical business expenses associated with that work. That can translate to 40 – 70% of a CRB’s income going towards taxes, greatly reducing their ability to finance operations and future growth.
Higher interest rates
Since CRBs have limited access to banks and financial institutions, and demand for financing is high, they often must settle for high-interest, non-traditional loans. Lending rates for CRBs are up to four times higher than other industries.
Valley supports CRBs
Valley believes that every business should have the opportunity to take advantage of banking services to support their business. That’s why we’ve evaluated the risks and have opened the door to having conversations with cannabis-related businesses about helping them with their banking needs.