The U.S. Small Business Administration updated its lending guidelines with new rules that could have a major impact on businesses servicing the marijuana and hemp industries – not just plant-touching companies.
The revised guidance, published in early April, prohibits banks from issuing SBA-backed loans to any company that has a direct business relationship with a cannabis or hemp business.
For most marijuana companies, the rules are nothing new in an industry that’s known for getting the cold shoulder from banks, said Lily Colley, director of operations at Kalyx Development, a real estate and cannabis investment firm.
“Most operators have found alternative ways to fund their businesses other than going through traditional banks,” she said. “The larger indication here is that regulators are taking this business seriously.”
In its policy note, the SBA said it wanted to craft new rules to “specifically address businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana.”
Under the published guidelines, businesses now ineligible for SBA-backed loans include:
- Direct Marijuana Business – a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to personal use and medical use even if the business is legal under local or state law where the applicant business is or will be located.
- Indirect Marijuana Business – a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to support the use, growth, enhancement or other development of marijuana. Examples include businesses that provide testing services or sell grow lights or hydroponic equipment to one or more Direct Marijuana Businesses. In addition, businesses that sell smoking devices, pipes, bongs, inhalants or other products that may be used in connection with marijuana are ineligible if the products are primarily intended or designed for such use or if the business markets the products for such use.
- Hemp-Related Business – a business that grows, produces, processes, distributes or sells products purportedly made from hemp is ineligible unless the business can demonstrate that its business activities and products are legal under federal and state law. Examples of legal hemp products include paper, clothing and rope.
Kenneth Berke, co-founder of California-based PayQwick,a payment and banking solutions for cannabis companies, said he thinks the focus of the SBA rule changes are “misplaced.”
“If the business is operating in compliance with state law, is not implicating any of the enforcement priorities and the collateral can be sold without a license (such as extraction equipment or lights), then the SBA should be willing to make the loan,” he said.
“Compliance covenants covering state law and the Cole Memo can be built into the loan documents to ensure compliance and allow the lender to call the loan due if violated.”
Lisa Bernard-Kuhn can be reached at firstname.lastname@example.org