The Genesis of Financial Services in Cannabis
Limited cash flow, towering tax bills and restricted access to financial services are not setting up the industry for success.
Historically, the cannabis industry has faced a multitude of roadblocks. This comes as no surprise to you, I’m sure, as it’s only until recently that U.S. states have fought tooth and nail to legalize medicinal and adult-use of the plant and won. But one obstacle that the legal cannabis industry struggles with arguably more than others is financial services.
At the inception of the legal cannabis market, there was extremely limited access to banking, if any at all. Not to mention, human resources tools and support were virtually non-existent. Today, despite the growing success of the industry, cannabis businesses still grapple to obtain loans, manage their finances and payroll and stay up to date with the constantly changing legal and regulatory mandates. And let’s not forget about the ridiculously high tax bills because of IRC tax code 280E — but I’ll dive into that later in this article.
Even programs that are common in traditional manufacturing and production sectors, such as lease-to-own programs, have not been as easily accessible in the cannabis industry.
Overall, these shortcomings and restrictions have been hindering cannabis companies for decades. Not only do companies battle to build a thriving business, but a business that can simply survive.
And let’s be honest. Limited cash flow, towering tax bills and restricted access to financial services are not setting up the industry for success.
Here’s the main issue: cannabis is still not federally legal. So for years, financial services institutions have rarely wanted to step into the cannabis space to offer the support these legitimate businesses need. Whereas basic financial services are readily available to companies of all sizes in most industries and are often taken for granted to the point they just become an afterthought. This phenomenon is a detriment to the growth of the cannabis industry.
Likewise, cannabis is still currently categorized as a Schedule I substance despite federal announcements of the movement to reclassify cannabis as a Schedule III substance. Schedule I substances are defined as having no accepted medical use and a high potential for drug abuse. Whereas Schedule III substances are labeled as drugs with a low-to-moderate potential for dependence — even testosterone falls into this category.
The Internal Revenue Code Section 280E inhibits Schedule I substance-producing companies (including cannabis businesses) from deducting typical business expenses from gross income. So until cannabis is successfully rescheduled (which can still take a while before it goes into effect), businesses are forced to pay egregious annual tax bills.
Yet, hope is on the horizon, or even closer than it appears, as financial services are slowly making their way into the cannabis industry.
In recent years, the collective cannabis community has recognized that until cannabis is legalized at the federal level, there is no way for companies to survive long term as long as financial services are scarce. And while we’re certainly closer than ever before to federal legalization, we are not near the finish line yet.
As such, industry leaders have been thinking outside the box to make financial services more accessible to cannabis businesses.
We’re seeing it with the rise of Employee Stock Ownership Plan (ESOP) adoption in cannabis. Since the mid-1900s, large organizations such as Publix, and others in construction, manufacturing and retail have adopted ESOPs to gain tax benefits, facilitate succession planning and boost employee satisfaction. In cannabis, rather, organizations are leveraging ESOPs to mitigate IRC tax code 280E and operate tax-free.
As mentioned previously, lease-to-own programs are also just now coming into play in cannabis manufacturing. In particular, lease-to-own equipment programs eliminate upfront capital investment, providing cannabis manufacturers with the technology they need when they need it — a first-of-its-kind feat recently accomplished by automation machinery supplier LeafyPack. Whereas before, if a business didn’t have the funds to pay for high-tech equipment, they had to resort to manufacturing products by hand, slowing down production and efficiency.
And the movers and shakers of financial services in cannabis aren’t only cannabis leaders. We’re even starting to see cash management powerhouses such as Brinks, via partnership with PAI, entering the cannabis industry.
It’s exciting to see these financial service advancements enter cannabis as they’re vital solutions to keeping cannabis businesses afloat. If cannabis ends up getting rescheduled to a Schedule III substance, who knows what the industry may look like in terms of financial capabilities? If tax code 280E becomes irrelevant for cannabis after rescheduling goes into full effect, we can only expect more financial services and technologies will be brought into the cannabis space.
Until then, business leaders in and out of the cannabis industry must continue to produce innovative programs and tools to aid in the financial growth of the cannabis industry. Only then will cannabis businesses, small and large, have a chance at sustainable growth.
