For The Cannabis Industry, Loans Are Short And Interest Rates Are High

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With federal legislation banning cannabis, companies struggle to access the banking system. So the price to trade is the double digit interest rate.

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heyOn Wednesday, dozens of marijuana business leaders flew to Washington, D.C. lobby MP To pass a cannabis banking bill. Because weed is still banned under federal law, only a small fraction of the nation’s FDIC-insured banks are prepared to serve cannabis companies that operate legally under state law.

This week’s lobbying day, organized by the National Cannabis Industry Association, was an effort to prompt the Senate to pass the Safe and Fair Enforcement Banking Act (SAFE), which allows financial institutions to deal with cannabis companies without fear of breaking federal law. will allow business. , The bill has been passed by the House seven times but has been unable to make it through the Senate.

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Because of the federal constraint, the major credit card companies do not serve the industry, meaning most transactions at state-legal marijuana stores are in cash. And for businesses receiving loans, specific resources like the Small Business Administration’s low-interest loans are unavailable. Alternative lenders willing to take on the risk fill the void, but most offer higher interest rates.

Some lenders offer loan-shark interest rates of 40%. These lenders secure their loans, with weekly payments using the company’s real estate or cannabis license as collateral. But bespoke financials, a Los Angeles-based fintech company, is using the Goldilocks principle. Bespoke short-term loans offer high, but not astronomical, interest rates for cannabis dispensaries. Founded in 2018 by George Mancheril, a former debt investor at Guggenheim Partners, and Ben Dusastre and Pablo Bourquez Schwarzbeck, who co-founded farm financing company Produce Pay, Bespoke has funded more than $1 billion in the space.

“The industry shouldn’t have to wait until federal legalization to access capital,” says Mancherill, CEO of Bespoke. “At the end of the day, lending is lending.”

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Duncan Lay, who founded the California Street Cannabis two-story dispensary chain in San Francisco, also has two bars. He has no problem getting a line of credit for his watering hole, California Jack and Teeth. He uses online lender BlueVine to draw out lines of credit when needed. But banks and alternative lenders such as Blue Wine, Cabbage and Square do not work with marijuana companies.

“I know what it’s like to run a business that is highly regulated but federally legal,” Le says. “But this is not the case with cannabis.”

If the payment is 15 to 29 days late, the interest rate rockets to 50%. Thirty days or more, and the rate rises to 100%.

Thanks to a combination of California’s broken economic model and 280e, the federal tax code companies selling cannabis must pay under it, running a profitable business is tough. “There’s no room for error,” Le says. So he uses Bespoke’s line of credit 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 fair number to give me the flexibility to better manage my cash flow.”

Le also knows that he is being taken advantage of to some extent. The company credit card he uses for his bar has an annual percentage rate of 14%, while the bespoke offers the equivalent of a 20% APR. Still, the bespoke rates are “very good looking at cannabis,” explains Lay, who has been quoted with close to 30% APRs from other lenders, some of whom wanted the loan to be secured by their personal real estate. Bespoke, which has raised $8 million in equity from venture firms such as Casa Verde Sweat Equity Ventures, Greenhouse Capital Partners, and a $125 million credit facility from an unnamed institutional investor, secured its debt with a list of debtors.

That interest rate is calculated daily – at 0.05367%. If this is done annually, it will reach an APR of about 20%. But loans have 60-day terms and hooks are set if they are not paid off within that time frame. If a debtor is 1 to 14 days late, the interest rate increases to 25%. If the payment is 15 to 29 days late, the interest rate rockets to 50%. Thirty days or more, and the rate rises to 100%. In other words, no one in the cannabis industry can afford to be late.

“It’s basically like a flashy credit card,” Le explains, “which can be dangerous for any teen or addict, but when used responsibly it can help us manage cash flow.” A valuable tool to have.” To put these rates into context, if a cannabis retailer can obtain an SBA loan, rate will be around 6%,

According to the Financial Crimes Enforcement Network, only 755 Banks Serving the Cannabis Industry, (There were 4,200 FDIC-insured banks across the country in 2021.) Of the 755 banks, Dan Roda, co-founder of Arkansas-based Abaka, a fintech startup that helps marijuana companies maintain compliant banking and payment solutions, estimates that only 1% credit the industry. offer. In this environment, weed companies are happy to pay for the privilege of cash flow, just as anyone with bad credit is grateful to have a card with a 24% APR.

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Roda says there’s 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 doesn’t appear in any other industry.”

Roda says that high interest rates will remain in place until federal law changes. Karan Wadhera, managing partner at Snoop Dogg’s Casa Verde Capital, a $300 million VC fund focused on the cannabis industry, says most debt financing in the sector is only available to large companies operating in multiple states. “There is a whole section that is not able to be accessed [debt] easily,” says Wadhera. Casa Verde is Bespoke’s largest investor. The bespoke rates are high, but Wadhera says they are “quite in line” with the industry standard. “It will certainly improve as the industry is able to obtain lower costs of financing,” he says.

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But what happens to these types of lenders if the Safe Banking Act is eventually passed, or more reform takes place at the federal level? “Any form of legalization, de-scheduling or allowing financial institutions to work with cannabis in a broader way,” Mancherill says, “and we are really in a position to help catch 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 want.

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