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The cannabis industry suffers from lack of capital as a risky investment, as underground brands continue to thrive
by Paul Iacampo · April 17, 2023
Cannabis financing and the effects of the banking crisis What the collapse of SVB means for banking in the cannabis industry Conducting business with bigger banks is always a challenge for burgeoning industries, as securing capital for new ventures that haven’t proven their reliability over time is difficult. This is especially evident in the cannabis industry, which has until only recently operated entirely in the shadows, apart from the medical side.
Those entrepreneurs with experience in the illegal market meet unique challenges when they try to secure financing for new, above-board cannabis operations. Until cannabis companies have full access to mainstream banking, cannabis financing will remain laden with obstacles. In light of the recent Silicon Valley Bank collapse and the ripples of anxiety it sent through the financial world, it’s worth taking a look at where cannabis companies and activists are in their push to access the federally-regulated banking industry, something the largest companies in the cannabis space are adamantly demanding. What risks do cannabis businesses face in the current landscape, and what risk will they take on in a less-regulated, banking system? Cannabis Banking Problems Because cannabis is still a controlled substance at the federal level, cannabis companies are not privy to the same benefits available to conventional established businesses. Financing cannabis is a risky business for multiple reasons related to operating an all-cash enterprise, including a steady occurrence of armed robberies at dispensaries and challenges involved in paying wages and keeping correct documentation for tax purposes.
Complex regulations make it difficult and costly to meet the high standard a bank requires to do business with a cannabis company, and often dissuade potential entrepreneurs from even trying. The political push continues, but all efforts so far to introduce legislation that would better regulate banking in the cannabis industry have fallen short, in large part due to partisan politics. Bills like the SAFE Banking Act, which would allow cannabis companies to access safe, regulated banks for their crucial accounting needs, have yet to pass the Senate. If cannabis prohibition isn’t ended at the federal level and no new laws to remedy the current situation are forthcoming, the future of cannabis banking will remain fraught with unique obstacles. How do bank collapses affect the cannabis industry?
Since Silicon Valley Bank was tech-centric and didn’t invest significantly in the cannabis industry, marijuana businesses were spared the disaster that befell tech investors.
Ironically, the very fact that state-regulated cannabis companies are prohibited from doing business with federally chartered national banks likely prevented the Silicon Valley Bank collapse from disrupting the cannabis industry. Since cannabis financing is restricted to state chartered financial institutions that operate like banks but at a much smaller scale, the cannabis banking system is very much decentralized, making a large-scale crisis like SVB collapse unlikely, at least for now.
Nevertheless, the SVB collapse brings to light the importance of re-introducing sensible regulations to manage risky investments and ensure that future collapses don’t occur. Should the cannabis industry finally have access to national banks and a more centralized financing system, they will be vulnerable to the same risky investment practices with potentially catastrophic consequences, akin to those seen in the tech sector.