Small Cannabis Businesses Ask Congress for a Hand

Hindered by a lack of access to loans and banking services, owners hope for help from the Small Business Administration.

Jun 20, 2019 6:56AM EDT Business

Nikitha Sattiraju

Nikitha Sattiraju is a journalist. She previously reported on agriculture, sustainable development, and mental health in India.

Cannabis legalization may be spreading to more states, but starting and running a small business can be an uphill battle, particularly for members of minority groups without access to capital or banking services. So at a House Committee on Small Business hearing on Wednesday, advocates stressed the need for the kinds of loans and services for small cannabis startups that other businesses enjoy.

“Without access to capital, they are vulnerable to predatory lending and business practices,” said Shanita Penny, president of the board of directors of the Minority Cannabis Business Association. She added that these businesses need the support of the Small Business Administration (SBA) to start and expand their operations. Both direct and indirect cannabis businesses are not eligible for loans, loan guarantees, counseling sessions, and other services from SBA, because cannabis remains illegal at the federal level.

Penny, who owns Budding Solutions, a cannabis consulting and management firm based in Baltimore, and is part-owner of Dochouse, a Pennsylvania-based medical cannabis company, told Cannabis Wire that she and her partners had to depend upon private investors to expand Dochouse. As a result, her ownership in the firm has been diluted. “Whenever we needed capital, we were able to get it, but what that means for me is that I have less and less ownership in the firm I helped create,” said Penny. “It’s tough.”

The average start-up cost for a legitimate cannabis business is $775,000, according to the committee, and the average annual operating cost is $2 million. Additionally, business owners also have to pay for extra security measures, as they largely deal in cash. Financial institutions in general are hesitant to serve cannabis businesses because of the legal gray area created by inconsistent state and federal laws. But the institutions that do provide services often charge cannabis businesses extra for holding their deposits.

“You get bank accounts where they usually charge thousands of dollars in order to keep their bank accounts open, far more than any other businesses,” Morgan Fox, media relations director for the National Cannabis Industry Association, told Cannabis Wire.

As a result, some businesses resort to workarounds, such as creating holding companies under different names to hide the fact that they are associated with the cannabis industry, said Dana Chaves, chair of the National Cannabis Industry Association’s Banking Access Committee at the hearing. However, “banks are getting on to this and they do find out,” she said.

The lack of banking services is also a problem for cannabis regulators and law enforcement, who may find it difficult to track the money and collect data on how the industry is growing, said Fox. Meanwhile, cannabis businesses can also end up paying much higher taxes than other businesses, as they are not allowed traditional deductions or tax credits under federal law, Fox added.

Penny called for legislation that would create targeted SBA programs to ensure that minority business owners and people with prior cannabis convictions can benefit from the industry. “Access to SBA loans and services, with Congressional oversight, would help decrease the equity gap in the cannabis industry and keep cannabis revenues in the communities suffering the greatest economic and social harms of the War on Drugs,” Penny said.

These communities are already fearful of entering the cannabis industry, she said. And it has to do with the trauma that minorities, particularly black and brown people, experienced due to the drug war, Penny told Cannabis Wire.

“The people who lived through incarceration and over-policing of neighborhoods, they can’t wrap their heads around cannabis being legal, especially when it is still federally illegal,” Penny said. “So there’s only a small group of people that actually wants to get into the industry and there is no bank for them to go and get a capital loan from.”

Military veterans are also hesitant to enter the cannabis industry—either as employees or business owners—for fear of losing benefits from Veteran Affairs, Eric Goepel, founder and CEO of the Veteran Cannabis Coalition, told the committee. While VA healthcare does not disqualify veterans for using medical cannabis, they may be disqualified from other benefits, such as VA housing loans, for deriving income from a cannabis operation. Clarification from the SBA and VA on these matters would help veterans participate in the cannabis industry, said Goepel.

New York Representative Nydia Velázquez, chairwoman of the committee, said she is working on legislation to open up some of SBA’s programs to cannabis businesses.

“My priority is to ensure that small businesses have a seat at the table and can be involved in this emerging industry,” said Velázquez, “The fact of the reality is that the trend of legalization at the state level is not going to slow down, which will lead to more jobs in many sectors of our economy, and we need to see what role the federal government can play.”

However not everyone is on board with that priority. Representative Steve Chabot, a Republican from Ohio and ranking member of the committee, said that Congress should first vote on whether cannabis should remain federally illegal before discussing business challenges and opportunities.