While a majority of states have legalized or decriminalized recreational marijuana use, and the 2018 Farm Bill gave legal status to growers and sellers of hemp, cannabis is still classified as a Schedule I drug at the federal level — which means most financial services providers won’t do business with marijuana-related ventures.
However, a California visit last week by Sen. Mitch McConnell, R-Ky., raised hopes among marijuana and CBD purveyors that access to mainstream financial services could be coming.
Although it doesn’t contain tetrahydrocannabinol (THC), the psychoactive compound in marijuana, many sellers of wellness products incorporating cannabidiol (CBD) have found themselves entangled in the same morass.
“This is never something I thought would be the biggest challenge I would face,” said Brooke Alpert, registered dietitian and cannabis practitioner, and founder of Daily Habit, which develops and sells CBD powder. “I didn’t think how challenging simply opening a bank account would be,” she said.
Alpert said she had expected the Farm Bill passage to clear the way for businesses like hers, but found that even hemp’s newly legal status didn’t do enough to conquer the association with THC and pot. “We were very honest that we were working with CBD, and everybody turned us down,” she said, adding that there are benefits as well as drawbacks to being associated with marijuana. “CBD that’s made from industrial hemp is not the same as pot,” she said. “Sometimes it’s frustrating to get lumped in there, but in other ways it’s an amazing community to be a part of,” she said. "The more that we do to get the word of CBD out there, it’s going to reduce the stigma.”
Eventually, Alpert said, she was able to secure a business account with a bank whose branch manager used CBD oil. “I think we lucked out,” she said.
Help could be on the way. Last month, the Democrat-led House of Representatives passed the Secure And Fair Enforcement (SAFE) Banking Act, legislation that would give financial institutions working with cannabis businesses a safe harbor from prosecution. As the Senate majority leader, McConnell’s interest gave industry participants hope that the roadblocks preventing them from accessing mainstream financial services could be cleared if the chamber takes up the House bill.
“One of the things that benefits this debate is that hemp companies and CBD companies are also having a tough time getting banking, and those things are legal. Creating some better clarity around all of this stuff will make it better for everybody,” said Troy Dayton, CEO and co-founder of cannabis investment and market research firm Arcview Group.
But even those bullish on the cannabis industry acknowledge that winning enough bipartisan support to clear a GOP-led Senate won’t be easy, especially with the impeachment imbroglio overshadowing other political priorities.
I’d love to see it and I’m hopeful that it passes, but I’m not optimistic,” said Micah Tapman, chairman of cannabis market research firm BDS Analytics, adding that there is “massive growth potential” for the industry once legal barriers are eliminated.
“It passed the House, but it’s a Republican-dominated Senate, so I’m putting it at 50-50 that it’s going to pass,” said Tony Bautista, former treasurer of a regional California cannabis trade association and founder and CEO of Ganiyan, a CBD company.
Bautista, whose company makes and sells single use “k-cup” pods of non-THC-containing hemp, along with smoking devices, called his experiences with banks “beyond frustrating.” After being turned down by numerous institutions, Bautista said he eventually found one willing to let him open a business account because he uses the hemp flower, as opposed to extracting the CBD.
But getting a bank account is only the first challenge for cannabis-related companies. How to manage payments is another hurdle both marijuana and CBD companies must clear. Even in legal states, the pot business is a cash-dominated one. Advocates for banking reform say cannabis dispensaries struggle to find workarounds to issues like paying taxes and handling large amounts of cash securely.
For purveyors of CBD products, particularly online businesses without a physical storefront, being able to accept credit cards is a critical business function. “On the day-to-day side, the biggest problem is merchant services credit card processing,” Tapman said. “It’s a real impediment to not be able to swipe your credit card.”
Alpert experienced this when her merchant processor abruptly shut its doors last spring, leaving her unable to process customer payments for a number of weeks. “It’s not great for business to have all these stops and starts, especially a new business like us,” she said. “It’s really bad for the flow of business. It’s really hard to project what we’re going to do. We can’t estimate sales,” she said. Worse yet, the abrupt shutdown of her former payments vendor has made it difficult for Alpert to get access to those funds.
"It’s a heavy cost to bear for many of the small businesses in this space. It increases the cost of doing business, because companies have to have two or three banks.”
One option available for these kinds of companies is ACH or electronic checks, but Alpert worried that customers wouldn’t be willing to provide their bank account and routing numbers online.
Bautista also has struggled to find a way to process online transactions seamlessly. When he tried to open a merchant account with the bank through which he had a business account, he was told that that wasn’t allowed — unless his business was extraction, the exact opposite of the rules governing his existing account.
Bautista said he tried and failed to work through the discrepancy. “It didn’t matter how logical I was with them,” he said. For now, he relies on the ACH process, but like Alpert, he worries that this makes the purchase process more complicated and dissuades customers. “How many people know their routing number?” he said.
“This is a common issue, and it’s a heavy cost to bear for many of the small businesses in this space,” Dayton said. “It increases the cost of doing business [because] companies have to have two or three banks.”
Loans are another big area of concern. Much of the funding that powers industry growth comes from venture capital investment, a high-priced source of capital, Tapman said. “The biggest problem is access to growth capital, and that’s simply loans. These companies are paying mid-teens rates or selling equity, which is a very expensive way to finance your business,” he said.
Bautista said he borrowed against the equity in his home for start-up capital, but the first lender yanked his line of credit when it found out that his business was hemp-related. He has since sought out a second lender, but said the cost of the time and labor involved adds up.
“There’s a desire for loans,” Dayton said, expressing optimism that the SAFE Act will pass and trigger a flood of business-building pent-up demand. “When banking passes, I think that starts to open up more access to capital,” he said.