Darren Gleeman (Courtesy photo)
(This is a contributed guest column. To be considered as an MJBizDaily guest columnist, please submit your request here.)
Federal marijuana rescheduling has dominated industry conversations for months. It comes up in board meetings, refinancing discussions and nearly every capital plan I see come across a CEO’s desk.
President Donald Trump’s executive order directing cannabis be reclassified as a medicine feels like it should unlock something meaningful in lending markets. The expectation is understandable. But for lenders, the conversation is very different.
The prospect of Schedule 3 has not altered the core underwriting process. Lending has not expanded because the underlying constraints in cannabis finance have not changed yet.
When banks and funds look at cannabis-industry borrowers today, they are not trying to forecast policy outcomes. They are looking at how money moves through the business right now.
Hope-filled headlines matter far less than whether a company can reliably generate cash and service debt.
The secret to cannabis lending: What lenders are actually evaluating
There’s a misconception that rescheduling by itself is some kind of on/off switch for lending, as if a lender woke up the day after Trump’s executive order and suddenly decided it can lend. That’s not how credit works.
Lenders care about free cash flow. Period.
Free cash flow is the money left once the bills are paid, taxes are handled and the basics of running the business are covered. For lenders, it’s the most direct indicator of whether they will get paid back.
In many cases, cannabis operators present strong revenue numbers but weak free cash flow.
Rescheduling helps because it removes the punitive effects of Internal Revenue Code Section 280E. That matters because improves after-tax cash flow and reduces friction at the operating level.
But it does not eliminate normal corporate income taxes, and it does not change the basic economics of the business.
These companies still face the same operating realities they did before: margins, cost structure, competitive pressure, and execution risk.
This is why many operators struggle to obtain financing even when top-line performance seems stable. Lenders look at revenue durability, operating expenses, margins, leverage, and coverage ratios. Those are the same inputs before and after rescheduling.
Rescheduling may help at the margin by improving cash flow and, over time, by attracting more lenders into the space. More participants could increase competition and availability of capital.
But each lender is still underwriting the same fundamentals. Removing 280E changes the numbers on paper, but it doesn’t change what banks rely on.
They look at how the business is performing right now, not what might improve later if regulations shift.
One way to open cannabis cash flow: own your company
In a capital-constrained market, lenders are prioritizing certainty. Creditors focus heavily on cash flow coverage ratios, and they stress-test performance under downside scenarios.
In other words, they are asking how quickly cash generation deteriorates when markets move against the operator.
Employee Stock Ownership Plans (ESOPs), floated as a workaround to 280E, are not a financing solution by themselves, and they are not appropriate for every operator. From a lender’s perspective, ESOP-owned cannabis companies often present a materially different cash flow profile.
Because ESOP-owned companies are not subject to federal or state income tax, the cash that would otherwise be sent to Uncle Sam stays inside the business and presents a much more attractive lending opportunity for creditors. Lenders treat ESOP-owned cannabis companies very differently from businesses operating under traditional ownership structures.
It’s important to note that lenders aren’t underwriting ESOPs because they like the structure philosophically. They’re underwriting the cash flow outcomes that the structure produces. In practice, that has made ESOP-owned companies easier to model and, in most cases, lower in risk to finance.
How to find cannabis capital at a low interest rate
For ESOP-owned companies, cash-flow lending is real and repeatable. Loan sizing commonly falls in the range of roughly 1.0x to 2.0x EBITDA, underwritten on actual free cash flow. Senior interest rates are typically in the low-to-mid teens, and transactions are financeable when coverage is clear and sustainable.
The reason is straightforward: the ESOP structure allows the business to retain significantly more cash, reducing strain on debt service and improving lender visibility.
Most cannabis companies without ESOP ownership can’t borrow against cash flow alone. Instead, borrowing is usually secured by tangible assets like inventory, equipment, or property. The pricing reflects how tight margins are and how much cash gets absorbed by taxes, leaving little buffer if performance slips.
As a result, these loans don’t grow alongside earnings the way many operators expect.
Lenders are not “rewarding” ESOPs. They are responding to math. When a company retains more cash, free cash flow coverage improves, and leverage becomes supportable. When it does not, lenders protect themselves with higher pricing, tighter terms, and asset-heavy structures.
That distinction is what determines whether a deal closes or never gets past the first credit memo.
What operators can do in the meantime
Rescheduling matters, but by itself it doesn’t put new money into the market. It doesn’t eliminate price compression, and it doesn’t change how lenders manage risk today.
Lenders tend to move after changes are implemented and observable, not when they’re merely discussed. Until regulatory shifts translate into cleaner financials and more predictable cash generation, underwriting standards will remain grounded in present conditions.
That reality, while it may be disappointing, is actionable.
Operators who focus on strengthening cash flow, improve transparency and understand how lenders view risk are better positioned than those waiting for policy or headlines to do the work for them.
Darren Gleeman is the Managing Partner of MBO Ventures, a firm that specializes in business exits through tax-advantaged ESOP structures.
