Lessons Learned

Banks don’t want to invest in businesses with high risk and low margins. And, as a farmer, it’s already hard enough to get loans and financing. The problem with hemp is that the difference between federally legalized hemp and the Schedule I drug tetrahydrocannabinol (THC) is the result of a drug test that has to be given to the plant to determine whether or not it’s risky. Mark Goldfogel, former executive vice president for the Fourth Quarter Credit Union and current CEO of the cannabis consultancy group IWorkForCannabis, explains that banks want indisputable evidence to avoid liability.

“Where the rubber meets the road is how do you build a relationship with your banker that validates that they should not be worried that your crop could get risky,” said Goldfogel.

In December 2018, cannabis — specifically, hemp — was legalized in the Farm Bill. However, for growers of hemp intended for extraction of the non-psychoactive cannabidiol (CBD), the only clear guideline is that it must contain less than 0.3 percent of the psychoactive THC to remain legal and ineffectual on the consumer.

Hemp for CBD is new territory for the world of legalized cannabis production. Without getting into the technicalities of how and when hemp might go from legal to illegal, the fact remains that banks and financial institutions are reluctant to be associated with anything that might look sketchy in the eyes of the federal government. In June 2019, the Massachusetts Department of Agricultural Resources issued a guidance essentially outlawing CBD. As individual states interpret and respond to the U.S. Food and Drug Administration, hemp growers are caught in a challenging place. And even in states where cannabis products infused with THC are legal, like Massachusetts, it is possible that hemp for CBD products is not.

The enactment of the Secure and Fair Enforcement (SAFE) Banking Act is widely seen as a critical first step for protecting legitimate cannabis businesses — farms, service providers and processors — from being flagged as high-risk and left for dead. And while SAFE might increase costs for financial institutions around compliance and legitimacy, the goal is to normalize hemp production to ensure financial safety and security.

Credit cards are also difficult for hemp producers to access without high rates or the risk of closure without notice. The Drug Enforcement Administration, in an effort to prevent financing drug dealers — i.e., buying marijuana in a legalized state and selling it elsewhere — have made credit card processors leery of hemp CBD.

“The short answer is financial institutions are paid to be judgmental,” said Goldfogel. “You need to do everything in your power to demonstrate that you’re a legal business.”

Goldfogel asserts that anyone getting into cannabis should be prepared for losing a credit card account (or all of them) as well as having one’s bank accounts closed. When he shifted from operating a seed-to-sale cash management system to being a full-time cannabis industry consultant, he lost all of his bank accounts, some more than 15 years old.

With credit cards, it is a safe assumption that you will not have a normal interest rate.
“You’re going to be paying high-risk rates,” said Goldfogel. “There are companies who will do credit card processing, but generally speaking, it’s kind of a whack-a-mole game where you get up and running and then somebody comes through and closes down all of your accounts.”

He maintains that minimizing your exposure to sky-high interest is critical to not incur debt that will sink your farm or business down the road. Yet the reality is, hemp is legal.

“Hemp should have easy access to all financial institutions and opportunities,” said Goldfogel. Unfortunately, hemp growers and hemp-based businesses must work past the bias of the industry and educate others that they’re a safe risk. Goldfogel says that a business plan is never going to get to a decision-maker at Wells Fargo or some other bank. He recommends focusing on small, regional or agriculturally focused banks that are savvy enough to navigate the current ambiguity around hemp and CBD.

“The bottom line is that banks don’t like anything questionable,” said Goldfogel. To get started on the best possible footing in opening a bank account, growers need to be overprepared. Goldfogel explains that every detail — how you dress, organizing your documents, showing test results and data — is necessary to remove any bit of doubt someone may have about the legitimacy of a hemp-based business.

“You really need to demonstrate that you know what you’re doing and have addressed all of the areas of concern with care and attention,” he said. Furthermore, Goldfogel encourages people to open multiple accounts in order to protect against losing any in the future. “More often than not, a bank or credit union will open the account for you, but it won’t make it past a compliance person six to eight weeks later.”

Cannabis is a profit center for banks and credit card processors. Unfortunately, while everyone figures out how to move forward, fees and volatility are to be expected.

“The bank literally is making up its own guidelines in some instances,” said Goldfogel. And although he expects things to settle out in the days ahead, he said it is important to remember that banking is a privilege, not a right. According to Goldfogel, the easiest way to be successful is to show others that you are legit and as close to risk-free as possible through common sense things: documents, affidavits, testing, reports and other ways to validate your business.

“I’ve been in this industry for nine years,” said Goldfogel. “I expected a lot of this in-fighting and confusion. What I never expected was that once the federal government made it [hemp] legal that it would just get even more nonsensical.”

And yet, even despite the turmoil and ambiguity, the prospects of hemp as a sustainable agriculture solution are too full of opportunity to be put on the backburner. Growers just need to be prepared for getting caught in the mess as it all shakes out.