HEF Finance

Can cannabis companies get bank loans? Yes, but there’s a catch.

In the cannabis, MJ, hemp, and CBD world, obtaining debt financing can be uniquely challenging. Having underwritten various types of cannabis loans, we are constantly searching for new sources of debt capital that can help borrowers in a financially restricted market. Over the years, we’ve heard rumors of banks and credit unions that are participating in the lending space. We’ve even heard that from time to time, a credit union did in fact close a small loan for a cannabis company. But, more often than not, the rumors about banks or credit unions participating in the lending markets lead to a common and interesting end. This blog will focus on one such case study that ended in an all too familiar fashion.

One of our partners heard about a bank in California offering sub 5% loans for the cash-out refinance of cannabis use properties. Working with a borrower seeking capital, he reached out to the bank in question and they confirmed that they were offering loans to cannabis companies in this price range. The borrower’s disposition was financially solid. The property was situated in a densely populated city in a major metropolitan region. The business was producing revenue and profitable. All this to say that the file was about as strong as a cannabis cash-out refinance can be.

Having underwritten a good number of loans, our partner worked with the bank to package and underwrite the file to their specifications. Moving as fast at the bank would move, 5 months passed. At the end of five months, after numerous hours of communication, managing the appraisal process, and fulfilling ongoing requests from information from the bank, it was over. After 5 months, the bank felt as though the appraiser got the valuation wrong, so they terminated the file – a top shelf file in this industry.

The above story is the one most often told by the refugees who tell the tale of the “unicorn bank loan”. As it turns out with that particular bank, we have heard that story repeatedly, which begs the question: why would a bank advertise a loan that it may rarely, if ever execute? Perhaps they want to onboard the cannabis companies in to their banking platform and the fantasy loan is the bait. We don’t really know, however, waiting 5 months or longer to know if a business loan will get approved is a very costly proposition when contrasted with loans from private funds can manifest terms in less than 3 weeks. Not to mention, even if the bank loan did close in 6 months, what was the opportunity cost if a private money loan typically closes in 6 weeks or less? In the typically high margin cannabis world, the cost of 4-5 months of lost production could be far costlier than a higher interest rate.

Banks are participating in the cannabis industry and typically focused on lending in one or a few states at most. Typically, the underwriting is slow and the execution risk is high. Private money pools, at higher than the advertised cost of capital the banks provide, are still the most reliable and flexible option for borrowers in the cannabis space. As more banks participate in cannabis lending, it’s our hope that they will become a more and more viable option for cannabis borrowers.