Why haven’t Canada’s big banks been working more with cannabis companies?

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When the CEO of an industry colossus like Canopy Growth Corporation was dropped as a client by the Royal Bank of Canada upon discovering his cannabis roots, things started looking grim for the country’s cannabis businesses.​

Save for the comparatively brave Bank of Montreal—which has come to oversee the accounts of more than a dozen cannabis companies since 2015, and has subsequently lent Canopy a helping hand—most of Canada’s big five financiers (Bank of Nova Scotia [Scotiabank], Canadian Imperial Bank of Commerce [CIBC], Bank of Montreal [BMO], Royal Bank of Canada [RBC] and Toronto-Dominion Bank [TD]) have remained decidedly quiet about co-operation in what would seem to be enticing ventures. With the cannabis industry exploding, why have most of Canada’s big banks been so slow to ante up?

“If you look at Canada’s financial services, the majority of these institutions aren’t getting behind the industry,” says Rob Paterson, president and CEO of Alterna Savings and Alterna Bank. Alterna was one of the first financial services to open its doors to both kinds of green, and in so doing, became a beacon for aspiring cannabis ventures.

From bank-less to some progress

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The banks’ sluggish pace with the cannabis industry is hurting businesses at a time when they need them most 

“A few years ago, the big banks started closing accounts when they realized they were connected to cannabis… they were bank-less, and basically left to stuff their money into their mattresses because no one would support them,” Paterson says, adding that there’s nothing legally preventing Canadian financiers from working with cultivators and other members of the cannabis sector. “This isn’t a case of ‘we’re going into a fringe business here’. You can absolutely provide services to those licensed entities.”

Paterson suggests that while the tide is slowly turning, the banks’ sluggish pace is hurting businesses at a time when they need them most.

“Even with the huge amounts of capital flowing into the space, companies are restrained on the types of capital available to them,” says Harrison Phillips, vice-president of Viridian Capital Advisors in New York, who currently leads the company’s data collection and analysis projects, the Viridian Cannabis Deal Tracker and the Viridian Cannabis Stock Index.

Philips reports that conventional financings like mortgages, small business loans, purchase/inventory financing and others are almost non-existent in the cannabis realm.

“Assuming these instruments were available to cannabis businesses, the industry would benefit since companies wouldn’t be so dependent on cash transactions, like buying million-dollar extraction machines or acquiring and developing real estate,” he notes.

Phillips foresees that investors wouldn’t need to sell their shares to fund businesses, which he says helps preserve their equity. In his experience, term loans and mortgages appear to be the most-requested form of financial support from cannabis businesses—a trend he expects will continue, as newcomers often need capital more than a space for their yet-unrealized wealth. “We’ve seen a slow, but steady increase in traditional financial offerings by Canadian firms to businesses, though typically, only the more established ones that are more likely to pay the debt.”

Paterson explains that one reason for the top banks’ reluctance to shake hands with cannabis entrepreneurs is catching the side-eye from U.S. partners. “It’s not legal there federally, and the big five have strong interests over there,” he says. “They worry the U.S. will look at their assets, as they’re publicly traded, and be concerned about public sentiment.”

Paterson points out that since Alterna isn’t publicly traded, he doesn’t share the same anxieties.

Reception to cannabis industry warming

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Big banks seem to be increasingly receptive since cannabis legalization, even if support remains limited

If there’s any good news, Tantalus Labs CEO Dan Sutton says big banks have been increasingly receptive since legalization, even if support is limited at the moment. “We now have relationships with most of the tier-one banks in Canada,” Sutton reports, though he can’t comment on the nature of said relationships for professional reasons. “They’re getting an appetite to collaborate,” he adds.

The well of support isn’t completely dry; TD Bank listed 13 cannabis stocks to its recommendation list last summer, RBC and Scotiabank now have cannabis analysts, and CIBC made its first move into the field in early January with an $80-million loan to cannabis company PharmHouse Inc.

A former finance analyst himself, Sutton theorizes the banks might find cannabis too precarious at the moment, and that the industry may need to find its footing before it opens the floodgates. “It’s been aligned with boutique institutions… really frothy, exciting and overbought cannabis stocks.”

Still, Sutton is optimistic that a little extra patience will serve companies well in the long run. “At the core of all the hype, there are really solid businesses here,” he says. “And the opportunity to collaborate with the best finance professionals in the world will separate the wheat from the chaff.”

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