4 min read
4 min read
As more states regulate cannabis, banks and credit unions already offering deposit accounts to cannabis-related businesses (CRBs) are considering their next step. Lending is the natural progression, but it brings regulatory complexity, collateral uncertainty, and credit risk challenges. Financial Institutions (FIs) that want to expand responsibly must build programs on a foundation of extended due diligence, governance, collateral strategy, and sound credit risk discipline.
The cannabis industry is both expanding and restructuring. Newer markets continue to see growth as operators launch businesses and brands, while more mature markets are undergoing consolidation driven by price pressure and regulatory burdens. Both dynamics are fueling demand for capital, from healthy operators pursuing acquisitions to distressed companies seeking survival financing. Analysts estimate CRBs will require around $90 billion in growth capital over the next decade, with refinancing of existing debt totaling $8 billion in the next three years. Financial institutions that develop sound lending programs will be positioned to meet this demand.
Federal prohibition remains in place, but FinCEN guidance provides the framework for financial institutions serving state-legal operators. Banks must conduct enhanced due diligence, monitor all account activity, and file Suspicious Activity Reports (SARs) for every cannabis client. Beyond Know Your Customer (KYC), regulators increasingly expect Know Your Customer’s Customer (KYCC), requiring lenders to evaluate the counterparties, vendors, and distributors that make up a borrower’s ecosystem. This work is resource-intensive and non-negotiable, forming the compliance baseline for any cannabis lending program.
Governance structures must evolve alongside lending programs. Dedicated risk committees with cannabis expertise can provide consistent oversight, review portfolio performance, and update policies as regulations shift. Clear decision rights, escalation paths, and regular reporting strengthen accountability. FIs that attempt to manage their cannabis lending programs through risk committees that lack industry specific knowledge and without the proper credit risk models will find themselves at risk of exposure and in misalignment with regulators.
Key Insight
Financial institutions establishing a new lending program should utilize an industry specific credit risk model and determine a process for ongoing monitoring of CRB risk as part of a strong cannabis lending policy.
Collateral is particularly complex in cannabis lending. Real estate is often leased, not owned, and valuations of equipment or inventory have little to no value outside of the cannabis industry. Accounts receivable (AR) funding may be used to collateralize loans and lines of credit by using outstanding invoices as security, but it requires extensive KYCC and 3rd party audits of the AR. FIs that are lending today have taken a conservative approach that uses lower loan-to-value ratios and personal guarantees, and in cases where the real estate is owned by the CRB, writing more traditional real estate loans.
As with commercial lending programs, credit risk modeling for cannabis lending can be the difference between offering isolated credit facilities versus building smart, scalable programs. A reliable risk model for cannabis should combine traditional financial analysis with sector-specific factors such as regulatory and operational compliance, market analysis, and various industry-specific factors. And while standardized credit scoring supports consistent underwriting and provides the structure needed to expand responsibly, scenario testing and forward-looking sensitivity analysis are also key in helping FIs anticipate potential stress points.
Cannabis lending is not a matter of applying conventional commercial models to a new sector. It requires enhanced due diligence, specialized governance, careful collateral management, and tailored credit risk models. These factors, along with continuous monitoring of loan performance, covenant compliance, and regulatory compliance are essential to preventing defaults. With these elements in place, FIs can build programs that are both compliant and scalable, moving beyond depository services and providing much needed treasury services to a growing industry.
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