Lack of access to traditional banking relationships is one of the many obstacles cannabis operators must face on the path to becoming a successful business. When a company operates without a cannabis bank account, they run into increased risk and operational costs related to processing employees’ paychecks, paying bills, providing adequate reporting, etc. All issues mainstream businesses never have to worry about.
Although a growing number of financial institutions are willing to offer comprehensive cannabis banking and financial platforms, many cannabis business owners don’t understand the steps needed to find and manage an account for their business. In the process of providing Outsourced CFO services to cannabis clients, one of the first steps we take is to assist in establishing a secure banking relationship. In the following, we will lay out details of the current cannabis banking environment and provide key points to consider when exploring financial options for your cannabis venture.
SAFE Banking Act and current obstacles to cannabis banking
The SAFE Banking Act is currently in the news today and awaiting a vote in the Senate. The legislation has bipartisan support and widespread backing from financial institutions nationwide. The Department of Justice and The Financial Crimes Enforcement Network (FinCEN) under the Treasury Department are responsible for preventing money laundering and other financial crimes.
Although cannabis is legal for medical and recreational use in 36 states, it is still currently listed as a Schedule I drug under the Controlled Substances Act. Therefore, profits earned by cannabis businesses are subject to the classification of ‘illegally generated funds.’ Because banks and credit unions are federally insured, they are subject to Anti-Money Laundering (AML) laws and Suspicious Activity Reporting (SAR). They often decline to offer financial services to cannabis organizations as it can risk their broader portfolio and severe penalties from the federal government.
If the SAFE Banking Act passes, it will make banking services more accessible for companies operating in the cannabis space by prohibiting federal banking regulators from penalizing institutions from working with the cannabis industry.
How does banking work, and what are the costs for cannabis companies?
For financial institutions banking the cannabis industry, the perception of risk can be extremely high. For this reason, banking institutions operating with funds generated from the distribution and sale of cannabis typically perform extensive due diligence.
As a result, it is often challenging to establish a banking relationship with a financial institution. Banks and credit unions are operating loosely under the direction of the Cole Memo, which was first issued in August of 2013 by Attorney General Cole under the Obama administration. Similarly, the most recent FinCEN guidance regarding the cannabis industry was published in 2014, a lifetime ago for the emerging cannabis industry.
As such, banks and credit unions are setting many of their own rules as they do not have specific outlined regulations by the federal government at this time. Consequently, this causes rules to vary from the institution and even change within organizations regularly. Rules we’ve encountered in the industry include:
- Require initial deposit of $25,000-$500,000 depending on the institution.
- Cash deposits limits vary between $20,000 to $500,000 per day.
- Initial due diligence fees can range between $2,000-$10,000.
- Documentation review for new accounts can take weeks or even months and may require back and forth communication and additional documentation.
- Cash onboarding fees between 1%-10%.
- Many institutions require client referrals from trusted partners or existing customers.
Can cannabis retail locations accept credit and debit cards?
There are merchant processors that work with cannabis businesses; however, some critical factors to note. Credit cards are generally not accepted since Visa and Mastercard have indicated that transactions involving the purchase or trade of cannabis are not permitted on their networks until federal law allow. However, most merchant processors accept debit cards because the cash is already available in the depository account. In contrast, with credit transactions, Visa and Mastercard’s money is being floated.
Similar to banking charges, merchant processing fees can be significantly higher for businesses operating in the cannabis space. Shops unable to obtain merchant processing often choose to have an ATM installed on site. Some cannabis business owners elect to pass down the processing charge to the customer as a convenience fee or service charge. Although the overhead can be costly, more cannabis establishments are choosing to add debit cards as a method of payment since it can considerably improve revenue streams and spend per customer.
How do I set up my cannabis business with a banking relationship?
Step 1: Find a Cannabis-Focused Accounting firm
Naturally, we recommend working with GreenGrowth CPAs, but in general, it is very important to work with a cannabis-focused CPA firm. They’ll know the ins- and outs- of accounting for the industry and will help you set up your financials and accounting controls, so you’ll be a desirable client.
Step 2: Set up your financial controls and produce the necessary documents
A cannabis-friendly banking institution is likely to be very cautious when engaging with industry operators. To allay any issues, it is recommended that you prepare and provide all documentation ahead of time and present it in a professional manner. Working with a cannabis accounting firm will help you do this. The types of documents you’ll likely need include:
Employer Identification Number (EIN) – Most banks will require you to provide an employer identification number (EIN) to open a business checking or savings account. If you don’t have an EIN, you can get one for free by filling out the application on the IRS’s website.
Personal identification – The financial institution will want to see a driver’s license, passport, or other form of state-issued identification. Best to bring all the above.
Business formation documents – For a limited liability company (LLC) or C-Corp/S-Corp you’ll provide the articles of incorporation. These documents provide basic information about your company, its management structure, detail the financial managers, and provide some operational details.
Business licenses – This is a requirement for all businesses but is of even greater value for the cannabis industry. If you don’t have the appropriate license, you’re operating illegally, and no financial institution will work with you. The bank will verify these licenses during their due diligence period.
Certificate of assumed name – If the public or operational name is different than the name of your company’s legal entity, you will need to provide a certificate of assumed name, also known as a doing-business-as (DBA) name.
Financial reports – The number at types of reports each financial institution will require will vary, but it is best to provide as much verifiable information as you can. Key financial reports include balance sheet, Profit & Loss (P&L) statement, chart of accounts, etc. The more financial data you can provide the more legitimate and safer your business will appear to the financial institution.
From the financial institution’s perspective, it is all about minimizing risk. Any documentation you can provide to demonstrate the financial health and growth prospects for your company, the lower the perceived risk for the bank/credit union. Providing this information in a professional manner will put your business in the best possible light.
Step 3: Identify local financial institutions that are cannabis-friendly
For this step, just forget about the big global banks, as they won’t accept plant-touching cannabis businesses 99% of the time. Instead, you’ll want to reach out to local credit unions and banks. The best way to find a good fit is to consult with your cannabis accounting firm.
At GreenGrowth CPAs, we have networks of cannabis financial institutions throughout the country we can connect you with. Because we have established relationships, the bank managers know our recommendations will have the right entity structure, financial strength, etc. Plus, we know what those financial institutions are looking for and can ease the process of producing and verifying all documents.
Step 4: Determine what type of accounts you’ll need
Financial institutions offer a wide variety of services, all with different related costs and fees. You’ll want to choose only the services you’ll use the most. The most common are Business Checking Account, Business Savings Account, and Merchant Services Account, if you think you’ll be able to accept debit cards.
Step 5: Prepare for the costs of banking
Ideally, you’ll have the opportunity to compare and contrast cannabis banking options moving forward. But for many cannabis operators, their local credit union is the only viable option. If so, you’ll want to gain a full understanding of the financial requirements of banking there. This will include the processing fees and initial deposit requirements. For the latter, you may want to save for a period of time before engaging the bank to make sure you can meet their initial deposit requirements.
Final Thoughts on cannabis bank accounts
If you’ve followed all the above steps and partnered with a cannabis accounting firm like GreenGrowth CPAs, you shouldn’t have any issues finding a securing a cannabis bank account. If you’re still struggling to establish a viable business banking relationship for your cannabis business, our advisors are here to help. GreenGrowth CPAs has many partnerships with banks and credit unions across the country where we refer our clients.
For recommendations and assistance getting started or finding a new business banking relationship, visit us at www.GreenGrowthCPAs.com or contact us at 1-800-674-9050. Be sure to follow us on social media for more business banking tips for your cannabis venture.