Cannabis as Collateral for Loans

How can you secure a loan for your marijuana operations if your lender cannot take your product as collateral?

Given the federal scheduling of marijuana, obtaining loans and finding banks are difficult propositions for the marijuana industry. But it's not just the client that poses an issue for most lenders, it's also often the collateral.

Marijuana can be a problematic collateral source for creditors. Just look at Colorado- the state prohibits secured interests in Medical Marijuana, Medical Marijuana Concentrates, and Medical Marijuana-Infused Products. But, let's assume that a creditor is legally permitted to take a security interest in a debtor’s marijuana crop to secure an obligation. Even then, the creditor faces two issues:

(1) the federal government can seize a marijuana crop or marijuana products if they want (warning: Sessions wants it to happen). Such a seizure can result in a total loss of the creditor’s collateral and the debtor losing its primary revenue source, which could lead to its insolvency and bankruptcy; and

(2) if the creditor seeks, for example, to repossess a marijuana crop, that creditor could be in violation of both federal and state law (presuming there is a state prohibition against non-licensed individuals and businesses possessing marijuana). That could leave the creditor with no legal means of selling and monetizing the repossessed crop.

Neither of those issues are good news for a creditor.

But that's not the end of the concerns. Federal law permits the federal enforcement agency to seize marijuana-related real estate assets and strip otherwise legitimate lien rights of lenders. Why? Because unsurprisingly, the government’s forfeiture rights in seizing property used to grow marijuana outweighs a lender’s lien rights.

Still interested in lending to a marijuana business? There are ways to protest your interests, such as obtaining personal guarantees. Lenders may also obtain security interests in other assets of the debtor’s business, such as the equipment or real estate (however, such assets are still exposed to federal government seizures). Debtors should also expect to be charged higher interest rates to offset the risk involved in such transactions. Additionally, debtors shouldn't be surprised if they are required to pledge a certain amount of cash or cash equivalents at a desired value of the debtor’s product.

Simple business transactions are complicated by the nature of a marijuana business. Make sure to consult with a professional who understands the laws at play when providing or obtaining a loan for your marijuana operations.