As Cannabis Banking Becomes Increasingly Competitive, Financial Institutions Must Rethink Their Strategies

As cannabis banking becomes more competitive, especially in states with mature markets, financial institutions are being pushed to reevaluate their approach. While cannabis accounts provide core deposit growth, the real potential lies in lending.

The Growing Demand for Cannabis Lending in an Expanding Market

For banks and credit unions willing to navigate the risks of this high-growth industry, the rewards can be significant for both lenders and borrowers. The cannabis sector requires tens of billions of dollars annually just to sustain operations, with even greater capital needed for expansion.

A report from Oregon-based Whitney Economics in October 2024 states that the U.S. cannabis industry will require between $65.6 billion and $130.7 billion in sustainable growth capital over the next decade. Additionally, it projects that financial institutions willing to lend to cannabis businesses could generate $1 billion to $2.4 billion in potential interest revenue during the same period.

The Evolution of Cannabis Lending: Shifting From Alternative Financing to Traditional Institutions

Historically, cannabis operators have relied on friends, family, and equity investors to secure funding. However, as early investors reach their financial limits, businesses are increasingly turning to alternative lenders and traditional financial institutions to bridge the funding gap.

Yet, challenges persist. Many lenders remain hesitant to work with cannabis businesses due to the complex legal and compliance landscape, despite the increasing number of financial institutions entering the space.

Challenges of Cannabis Lending: Compliance, Risk, and Regulatory Hurdles

Cannabis lending differs significantly from traditional lending due to regulatory concerns, high tax burdens, and the volatile nature of the market. Cannabis businesses often have lower debt-service coverage ratios, making financing more challenging.

Lenders employ stricter policies, such as reducing loan-to-value (LTV) ratios to mitigate risk. While commercial loans typically offer up to 80% LTV, cannabis real estate loans often cap at 60% due to concerns about resale value. Retrofitted properties for cannabis operations may have limited resale potential, making lenders cautious.

Additionally, cannabis inventory cannot serve as collateral, restricting financing options. Without access to Small Business Administration (SBA) loans, cannabis companies must seek higher-cost financing. Moreover, cannabis businesses cannot file for bankruptcy under federal law, exposing lenders to additional risks.

Innovative Fintech Solutions: Helping Financial Institutions Enter Cannabis Lending

Fintech solutions are emerging to address the complexities of cannabis lending. Compliance tools, credit-risk ratings, and loan-structuring services enable banks and credit unions to navigate the industry more effectively. These solutions help mitigate risk while improving accessibility for cannabis operators seeking financial support.

The Regulatory Landscape: Potential Changes in 2025 That Could Shape the Industry

Two significant regulatory developments could influence cannabis lending in 2025:

Rescheduling Hearings – The process to reschedule marijuana has been delayed, with hearings put on hold by a judge overseeing the case.

Farm Bill Reevaluation – A widely anticipated update to the Farm Bill may clarify the legal status of hemp-derived cannabinoid products, potentially opening the door for increased financial services.

Even if cannabis becomes federally legal, banking challenges will persist due to high regulatory scrutiny, similar to other highly regulated industries like alcohol and gaming. Fintech solutions that provide transparency and data-driven insights will be crucial in ensuring compliance and fostering trust between lenders and cannabis businesses.

Expanding Cannabis Lending: A Path Toward Industry Normalization

Many financial institutions still perceive cannabis businesses through outdated stereotypes. However, as more lenders engage with the industry, they recognize the professionalism and growth potential of legitimate cannabis businesses.

Expanding cannabis lending is essential not only for refinancing existing operations but also for fueling sustainable growth in the industry. By embracing this sector, financial institutions can contribute to long-term normalization while capitalizing on a lucrative lending opportunity in 2025 and beyond.