As recreational cannabis sales take off in Rhode Island, opening and running a business still isn’t exactly simple for these merchants.
For one, a delayed appointment process for the state’s Cannabis Control Commission has set back potential opening dates for all but the state’s preexisting medical marijuana compassion centers, which can automatically double as retail dispensaries. Then, there’s an issue that’s long-plagued cannabis businesses around the
country: many banks just won’t work with them.
Gary J. Vierra, senior vice president and chief financial risk officer at the Swansea-based BayCoast Bank, estimates that just four or five banks in Massachusetts will work with cannabis businesses. BayCoast is one of them, and he expects the institution will be among the few financial institutions to play this role in Rhode Island as well.
That’s not without reason, Vierra says. Many credit card companies will not process transactions involving cannabis, so those businesses must deal primarily in cash.
And for banks, that means accepting the additional security risk that comes along with a primarily cash-driven business and taking extra measures to meet federal standards around legitimacy, laundering and other illegal means of financing.
These same forces put cannabis businesses at risk.
“I would say the majority of their transactions are cash transactions, so they have to make sure they have controls in place to secure the cash,” Vierra said.
“Being able to deposit it at a financial institution allows them to not store large amounts of cash on-site at their businesses, so it lowers the risk of theft and robbery and also allows them to more easily take care of their business transactions such as paying bills, paying employees and so forth,” he added.
Some employees at cannabis businesses have even had trouble getting banks to process their paychecks, Vierra says.
Gov. Daniel J. McKee signed legal recreational cannabis sales into law in May, making Rhode Island the 19th state to legalize cannabis. Massachusetts and Connecticut have legalized recreational cannabis, too.
As of Dec. 1, five medical marijuana compassion centers started selling recreational products under hybrid retail licenses: Aura of Rhode Island Inc. in Central Falls; Summit Medical Compassion Center Inc., doing business as RISE Warwick in Warwick; Greenleaf Compassionate Care Center Inc. in Portsmouth; Mother Earth Wellness Ltd. in Pawtucket; and the Thomas C. Slater Compassion Center Inc. in Providence.
Retailers that did not currently exist as compassion centers are stalled as the state sets up its Cannabis Control Commission. Under its original deadline, the commission was supposed to be established with three members earlier this year.
It’s unclear how many banks in Rhode Island will get involved with cannabis businesses.
Seeing a gap in service as recreational sales get off the ground in the Ocean State, BayCoast decided it was worth the risk, Vierra says.
“With the onset of a number of these recreational retailers beginning operations, we found that overall, there is a security risk to the businesses in the communities they operate in,” he added.
“In the absence of a bank offering services, they were carrying around bags full of money to pay their bills, so that increased the risk to other area businesses and our customers in these communities,” Vierra said.
BayCoast now works with about 60 cannabis businesses, including dispensaries, cultivators, manufacturers and transporters. While most operate in Massachusetts, the bank has picked up a few clients in the Ocean State.
Magnus Thorsson, a Johnson & Wales University professor who oversees the business side of the school’s Cannabis Entrepreneurship Program, says that discrepancies between federal and state legalization can also throw a cannabis business’s overall financial health into jeopardy.
“Any kind of capital investment that cannabis businesses have had to do, they have had to go to nonconventional financing,” Thorsson said, “be it venture capitalists or people who are willing to take a loan on what is perceived as risky because it’s hard if you’re dealing with something that is not federally legal.”
While these funders make up most of a cannabis operation’s finance options at the moment, Thorsson says, they come with stipulations that businesses in other sectors don’t need to consider when working with banks.
“You need to give out an equity share of your own business” when working with venture capital funds and investors, he said. “When you’re cash-strapped, you’re basically forced to sell a portion of your business, which can make your business operation more difficult because now you have less ownership, less agency.”
Thorsson has also heard from businesses in the farming, supply and manufacturing sectors of the cannabis industry cite challenges keeping their account receivables within a reasonable range as they attempt to financially support different facets of the industry.
“Other cannabis manufacturers have had to step in and provide credit for retailers who are buying product from them,” Thorsson said. “That is a challenge because if you are a farmer, you can’t also be a bank.”
Thorsson sees these obstacles having dire consequences for some cannabis retailers as competition intensifies – particularly from Massachusetts, where retailers had a multiyear head start to establish themselves and gain customer loyalty.
“When a retail or manufacturing business faces competition, having access to available credit is critical for their success,” Thorsson said. “Seeing that that’s not available, you’re going to see some businesses that simply are not going to be able to bridge these financial challenges.”
I don’t blame the banks for not wanting to do business with cannabis dealers. The risks outweigh the rewards.