CANNABIS FINANCE · DEBT SERIES, PART 2 OF 3
By Melissa Diaz, CPA · High Rock Accounting
Ask any cannabis operator about their loan terms and watch their face drop. The rates are brutal. A normal business might borrow in the single digits, sometimes well below that. A cannabis company? Try 11% on the low end up to 23%.
Why the huge gap? It’s not random. There are real reasons cannabis money costs this much. Let me walk through the big ones.
First, the lending banks are very limited. Marijuana is still illegal at the federal level. Most banks won’t touch it. That leaves a small group of specialty lenders who know the space. And when only a few players will lend to you, they set the terms. Higher rates. Tougher collateral. Lender-friendly rules baked into every deal. That’s just supply and demand.
Second, there’s Section 280E. This one’s a killer. 280E blocks cannabis companies from deducting normal business expenses on their federal taxes. Rent, payroll, marketing, most of it isn’t deductible. So a cannabis business pays tax on a much bigger number than a regular business would. That eats into cash flow. And less cash flow means less money to cover loan payments. Lenders see that risk clearly, and they price accordingly. Yes, medical marijuana got rescheduled in April. But the industry still lives largely on the recreational side, for which 280E still applies.
Third, collateral works differently in cannabis. In a normal real estate loan, a bank might lend you up to 80% of a property’s value. In cannabis, that number often drops to around 60%. Sometimes lower. One bank’s cannabis loan book showed an average loan-to-value of about 54%. The reason is resale. A building retrofitted for growing cannabis is hard to sell. Not every buyer wants a facility full of grow lights and special ventilation. Lenders assume they’ll get less if they ever have to sell it.
The collateral gap
Traditional commercial real estate loans can reach 80% loan-to-value. Cannabis loans often cap around 60%, and real-world bank portfolios run closer to 54%. Hard money lenders can drop to 50% and charge 15% to 20%.
Here’s something a lot of cannabis operators don’t realize about collateral. Lenders often want more than just the building, even in traditional debt deals. They’ll take a claim on your operating company, your inventory, and even your license. That way, if things go sideways, they can sell or lease a working business, not just an empty box. But in cannabis, none of those assets hold much value to a bank lender. They cannot sell your inventory or run your business without a license, and they cannot accept your cannabis license legally. So the largest assets on your balance sheet may be completely unusable as collateral.
Fourth, there’s no bankruptcy protection. This is the big one nobody talks about enough. When a normal business gets in trouble, bankruptcy court gives it room to reorganize. Because marijuana is federally illegal, federal bankruptcy isn’t available. If you can’t pay, there’s no reset button. Lenders know this. It makes every loan riskier for them, and riskier loans cost more.
Put all of that together, and the high rates make sense. Fewer lenders. Heavier taxes. Weaker collateral. No safety net. Each one adds to the price of money.
You can’t change the rules of cannabis lending. Not yet. But you can change how ready you are to meet them.
So what does this mean for you? It means the cheap money most industries take for granted isn’t coming to cannabis anytime soon. Even if rescheduling moves forward, it won’t flip a switch. Some of these problems, like the collateral issue and the shortage of lenders, will stick around for years.
But here’s the part that gives me hope. The operators who understand these rules can play them better. If you know lenders worry about cash flow, you make your cash flow easy to see and easy to trust. If you know they discount your real estate, you bring other assets to the table. If you know they fear a default with no bankruptcy backstop, you show them why a default won’t happen.
And the most expensive money is the money you borrow in a panic. The cheapest money goes to the operator who walked in prepared, with clean books and a clear story. Same business. Same industry. Wildly different terms.
The cost of cannabis capital is high for reasons that won’t vanish overnight. Knowing those reasons is the first step to paying less.
More in this series
Part 1: The Cannabis Debt Wall Is Here
Part 3: How to Get Ready Before You Ask a Cannabis Lender for Money
Sources
LTV caps, 280E cash-flow squeeze, and facility resale risk: MJBizDaily
Interest rate ranges by operator size: Cannashield
Hard money rates and lower LTV: Loanviser
Limited bankruptcy protection and refinancing pressure: Loanviser
About the author
Melissa Diaz, CPA is a founding partner at High Rock Accounting, where she leads outsourced accounting and fractional CFO work for cannabis operators. She helps dispensaries and multistate operators build investor-ready books, manage cash flow, and get in front of financing decisions before they turn into emergencies.
Talk to High Rock about your debt position: highrock.co/contact
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