The US cannabis business has a very particular cash flow problem – too much of it.
Marijuana can be sold legally in 36 US states and the District of Columbia (DC) for medical use and in 15 of them and in DC for recreational purposes. But it is still illegal on a federal level, meaning most banks refuse to service the industry in case they fall afoul of money laundering laws.
With the COVID-19 pandemic and increasing legalisation driving a surge in cannabis use, the sector’s producers, manufacturers and retailers are awash in cash, adding risk and costs to the most basic business transactions from paying employees and filing taxes to finding somewhere to store their income.
“All this cash flowing around is just a recipe for disaster,” said Smoke Wallin, chief executive of hemp health products maker Vertical Wellness Inc. “How do you account for it? Where do you keep it? How do you move it? Even in a safe, it’s a security risk for employees.”
Ryan Hale, a US Navy veteran and co-founder of cash management firm Operational Security Solutions, had to persuade a cannabis farmer in California to stop hiding cash in a tree. On another occasion, Hale had to help a bewildered retailer who had lost count of the dollar bills overflowing from his store’s lockers.
Legal US cannabis sales grew 30 percent to $22bn last year, more than the $17.5bn Americans spent on wine, according to data from Euromonitor. Sales are expected to jump more than 20 percent this year.
Too much cash
The sales boom could have left cannabis companies with a cash pile of more than $10bn to deal with last year, according to research firms Headset.io and New Frontier Research.
Big players can afford unmarked armoured vans and heavily armed guards to transport money, but smaller operators have to rely on themselves.
One producer in Los Angeles, who declined to be identified, said he had to carry $120,000 in a bag and drive for six hours from Los Angeles to Oakland to pay a supplier instead of taking a flight and putting himself at greater risk of being robbed or the money being confiscated by airport security.
During the last weekend of May 2020, when protests erupted across the US against police brutality and racism after the murder of George Floyd, there were at least 43 attacks on dispensaries along the West Coast, according to Cannabis media site Leafly’s review of police reports and business owners’ statements.
One of the stores attacked was Cookies Melrose in Hollywood, owned by rapper Gilbert Milam Jr, known by his stage name “Berner”.
The store suffered damages in the “high six figures” when approximately 100 people attacked it on May 29, a spokesperson said.
As the legalisation of cannabis gathers steam across states – New York and New Mexico will allow marijuana for recreational purposes in the next few years – politicians are looking at ways to make it easier for the sector to access banking services.
The House of Representatives passed a bill in April that would allow cannabis firms to have bank accounts, get loans and accept credit card payments but it may not make it to the Senate because Senate Majority Leader Chuck Schumer wants to work instead towards lifting the federal ban on cannabis.
A full federal green light is the industry’s ultimate goal but it is not counting on Schumer’s pledge to make it happen by next year.
Shares of US cannabis companies, listed in Canada because they are barred from US exchanges, are up just 9 percent so far this year according to the AdvisorShare Pure US Cannabis ETF and off nearly 29 percent from a February peak.
Banking services at a premium
In the meantime, marijuana businesses have to hunt for friendly banks.
Only 515 of the more than 8,200 federally registered banks and one in 30 credit unions in the US worked with marijuana businesses at the end of 2020, according to data compiled by government agencies.
The service comes at a premium as the federal illegality increases the amount of paperwork needed by banks.
Chris Driessen, chief executive of producer SLANG Worldwide Inc, said it cost his firm $40,000 to avail banking services in Colorado, just one of 12 states in which the company operates. Normally, a business checking account would cost less than $100 to open.
“Standard banking for companies is often 95-percent cheaper than the cost to bank cannabis companies,” Driessen said.
Maps Credit Union is one of the longest-serving financial institutions working with the cannabis industry. It has taken in more than $1.79bn in cash deposits from the sector in Oregon since January 2017 but that has entailed filing tens of thousands of reports required under financial crimes watchdog FinCEN’s guidance for cannabis banking.
“Serving these businesses is not cheap. It’s a completely different ball game,” said Rachel Pross, Maps’ operations chief, pointing to its use of costly anti-money laundering software, external auditors and legal counsel.
As demand grows, investors have poured more than $2.5bn into cannabis tech startups since 2018 and special purpose acquisition companies or SPACs that target the broader cannabis industry, have raised $3.9bn to date, according to Viridian.
Within the industry, however, some cannabis executives are not able to get loans and struggle even to retain personal accounts.
Cookies owner Berner said many banks had declined to be associated with him since he got into the cannabis line in 2015.
“My clothing business did $32m last year, but multiple banks have asked us to leave,” he said. “You’d like to go into a normal banking establishment and just be treated like a normal human being.”