Why Is It So Difficult To Find Cannabis Financial Services?

If you’re a cannabis business owner, chances are you’ve run into issues finding — and possibly keeping — financial services like banking, lending, or payroll. While none of these issues are permanent roadblocks to getting the basic business services you need and deserve, the process is certainly no walk in the park.

Why is it so much harder for cannabis businesses to find financial services than other types of businesses, and what are the steps you can take to secure the financial services you need to run your business? Fortunately, it’s not as difficult to find cannabis banking and financial services as it may seem. Read on to learn more.

A brief history of cannabis financial services

The lack of access to financial services is primarily due to the federal prohibition on cannabis, coupled with the hesitance on the part of some financial institutions to work with an industry that the federal government considers illegal. Here are some of the many ways that dynamic has impacted the legal cannabis industry.

Banking

Every cannabis business needs a bank for a multitude of reasons. However, banks are not ready to work with an industry they do not understand, given their conservative and cautious nature. Cannabis is so new — on top of federal prohibition, lack of education, and stigma around the plant — that many banks have decided to avoid the industry altogether. This is the case even though banking state-legal, plant-touching cannabis businesses is not outright prohibited by key federal regulatory agencies. As a result, it can be hard to find a bank willing to work with plant-touching businesses like a grow, dispensary, or extraction facility.

Read More: Cannabis banking is a social good, from combating money laundering efforts to budtender safety. Read why it’s in the best interest of our communities to bank cannabis businesses.

Some cannabis businesses have misrepresented their operations to find a bank willing to work with them. While this may work at first, the bank inevitably finds out the business is part of the cannabis industry. This leads to sudden account closures and a major interruption in cash flow. For small businesses, the impact is so devastating that it could grind all operations to a halt.

To avoid this painful process, some cannabis businesses choose to simply operate in cash. This makes remote transactions impossible, limiting ecommerce and delivery opportunities. Without the ability to open a settlement account, you can’t accept debit cards in store, an option that many shoppers want to have. Keeping piles of cash on hand has made cannabis businesses prime targets for robbery, especially on big sales days like 4/20 and Green Wednesday. Going this route also cuts off possibilities to develop a banking or financial relationship that could extend funding options your business could use to grow.

Payment processing

Every time a customer swipes their credit card, a payment processor initiates a transfer between the customer’s bank and the merchant’s. In cannabis, though, payment processing is a restricted area. Major credit card networks like Visa and Mastercard have refused to support high-THC cannabis (“marijuana”) transactions, for example, limiting the payment options dispensary customers have at the point of sale. This can be enough to scare off some banking providers from servicing the cannabis industry.

Read More: Unfamiliar with some of the vocabulary in this article? Check out our cannabis banking dictionary for a helpful translation.

Many cannabis businesses opted to leverage point of banking solutions, also known as cashless ATMs. This controversial method of supporting debit card transactions involves customers making a “withdrawal” for a total that covers their purchase and then receiving change in cash.

Cannabis payroll

A business stays operational because of its employees, so paying them accurately and on time is critically important. Payroll services are essential to properly track payments, stay on top of taxes, and run an efficient back office. Unfortunately, the challenges in cannabis banking extend to processing payroll, issuing paychecks, and offering direct deposit.

To solve this problem, cannabis businesses need to find a payroll provider willing to work with them. Some payroll providers are concerned about causing issues with their banks — banks that may or may not be cannabis-friendly — that jeopardize other aspects of their business. Others are concerned that they may not be able to prove their clients’ compliance with state laws if asked, or they may be concerned about putting their insurance policies in jeopardy. Others, yet, do not want to jump in due to reputation risk or stigma, a lack of knowledge about the industry, or they simply have a policy not to service these kinds of clients. This leaves cannabis businesses struggling to find a willing partner who can help them with this important work.

Cannabis financing

Last but not least, companies need capital to launch and grow, but that hasn’t always been so easy for cannabis businesses to come by either. Originally, banks did not lend to cannabis businesses for fear of running afoul of anti-money laundering (AML) laws. While this is changing and there are some banks willing to lend to cannabis companies, that’s not the case across the board.

One of the biggest concerns is that there is no framework for banks when it comes to lending to the cannabis industry. There is no standard credit score for cannabis companies and no accepted underwriting model for the industry, which makes it difficult for financial institutions to evaluate risk. Finally, these institutions cannot access federal bankruptcy protections for cannabis companies. If a customer goes out of business or is shut down for non-compliance, banks have no way to recuperate their lost funds. Financial institutions are simply not willing to take the risk.

The result is that cannabis businesses primarily raise capital through private sources. This may mean borrowing money from friends and family, seeking a loan from private lending firms like Fundcanna, or selling equity to private investors. While cannabis capital exists, the capacity nationwide is limited and the funding can be more expensive than a bank loan would be. The lack of funding options can limit the growth of cannabis businesses and represents a significant barrier to entry for startups.

Access to cannabis financial services is improving

Despite the historic challenges surrounding cannabis banking and financial services, there are cannabis-friendly financial institutions out there willing and able to support state-legal cannabis businesses today. Don’t believe naysayers that claim cannabis businesses are “locked out” of the U.S. financial system. That simply isn’t true. Access to cannabis financial services is here and improving by the day as the legal cannabis industry expands and more financial institutions become comfortable with the idea of working with cannabis businesses.

For cannabis operators, working with a cannabis-friendly institution means being able to be open and honest about business operations from the start of the relationship. It means working with a partner who understands and believes in the cannabis industry and wants to help companies grow. It also means reliability and trust, so cannabis operators can trust that their bank or payroll provider or payment processor won’t pull the rug out from under them, which has so often been the case in the past.

However, these cannabis-friendly financial institutions can be difficult for business owners to find, let alone navigate the application process. That’s where Green Check comes in. If you’re in the market for cannabis financial services and aren’t sure where to start, visit the Green Check Connect marketplace, which serves as the bridge between verified compliant cannabis businesses and cannabis-friendly financial services providers.

4 tips for cannabis businesses looking to secure financial services

Finding cannabis-friendly institutions to work with is half the battle, but starting your relationship on a strong foundation is paramount for success.

1. Be transparent and forthcoming

Give your vendor a clear, transparent understanding of your business. Misrepresenting your business only sets you up for potential rejection down the road, and plus, it’s not necessary if you meet with cannabis-friendly organizations.

If a financial institution rejects your business, they weren’t the right partner for you in the first place. Keep looking, and you may be surprised to find that there are more options than you initially thought. For example, it’s not uncommon for a bank to service dispensaries but not to work wholesalers or manufacturers.

2. Organize your documents

The more organized you are, the faster your application can be processed and the sooner you can be onboarded by your financial service provider. Not sure what you need to get started? Review our checklist of documents you need to open a cannabis bank account or obtain other financial services.

3. Communicate proactively

Don’t be afraid to speak up early and often when working with a financial institution. Navigating the cannabis industry can sometimes be challenging, but your financial service providers are here to help you. Chances are they’ve seen your situation before, so leverage their expertise for the benefit of your business.

4. Explore opportunities to improve

Financial institutions have a broad perspective on the industries they serve and businesses that are similar to yours, as well as insight into your most important financial data. As a result, they are excellent partners to help you fine-tune your operations and make decisions with your cash flow and profitability top of mind.

Meet with your financial service providers regularly and review your data. Ask them if they’re seeing anything unusual and how you stack up to other companies like yours. These insights may just yield new ideas and improvements you can implement to strengthen your business.

Bringing cannabis businesses and financial institutions together

When cannabis businesses and financial institutions come together, the cannabis industry becomes stronger. While challenges around cannabis banking and financial services remain, the landscape is a lot friendlier than it used to be. You just have to know where to look. With Green Check in your corner, you’ll have access to a vast network of cannabis-friendly financial institutions, from banks and lenders to insurance, payroll providers and more.