The road ahead for cannabis lending in 2025

(This is a contributed guest column. To be considered as an MJBizDaily guest columnist, please submit your request here.)

As cannabis banking becomes increasingly competitive – particularly in states with mature markets – financial institutions are being pushed to rethink their strategies.

While cannabis accounts offer the ability to add core deposits, the real opportunity is in lending.

For banks and credit unions willing to embrace the risks of this high-growth industry, the rewards can be substantial for lenders and borrowers alike.

The cannabis sector requires tens of billions of dollars annually just to sustain operations; even greater capital is needed to fuel growth.

According to an October 2024 report from Oregon-headquartered Whitney Economics, “The U.S. cannabis industry will need between $65.6 billion and $130.7 billion in sustainable growth capital to support new cannabis businesses and help refinance existing ones over the next decade.”

The report also estimated that, over the same period, the U.S. marijuana market will “generate roughly $1 billion to $2.4 billion in potential interest revenue for financial institutions willing to lend to cannabis businesses.”

Yet, it is challenging to make cannabis lending more accessible, which is where innovative companies are stepping in.

Fintech solutions such as compliance tools, credit-risk ratings and loan-structuring services are helping financial institutions stepping into the cannabis industry.

Lending isn’t just the future of cannabis banking, it’s already reshaping the industry.

The current cannabis lending landscape

The current state of cannabis lending reflects a gradual shift as traditional financial institutions begin to show more willingness to work in the space, while alternative lenders (businesses structured to lend directly to marijuana businesses) continue to play a significant role.

For many cannabis operators, securing financing historically has meant relying on friends, family or equity deals with high-net-worth individuals in exchange for company ownership.

However, these sources have been drying up as early investors reach their limits, pushing businesses to seek other avenues for financing.

While alternative lenders and an increasing number of traditional financial institutions are helping to address this gap, barriers remain, including the challenge of simply finding lenders willing to work with cannabis businesses.

Challenges of cannabis lending

Cannabis lending diverges from traditional lending because of the industry’s inherent legal and compliance risks and unique challenges.

As a new and evolving market, cannabis businesses face higher failure rates, saturated markets and steeper operational costs, including substantial tax obligations under Section 280E of the Internal Revenue Code.

These factors often result in lower debt-service coverage, meaning businesses have less cash flow available to cover their debts.

To mitigate these risks, lenders to cannabis companies implement stricter policies.

For example, in real estate lending, traditional commercial loans might offer loan-to-value (LTV) ratios of up to 80%, while cannabis loans often are capped at 60% LTV because of to concerns about resale value.

Properties retrofitted for cannabis operations might be harder to sell, as not all buyers want to invest in deconstructing grow facilities.

Lenders also might require additional safeguards such as personal guarantees or specialized collateral – but even collateralization is complex.

Cannabis inventory cannot typically serve as collateral because of legal restrictions, leaving businesses to pledge assets such as equipment, real estate or, in rare cases, licenses in states where it’s allowed.

Similarly, cannabis businesses are ineligible for Small Business Administration loans.

This exclusion limits their access to low-interest federal loans, forcing them to seek alternative, often higher-cost, financing solutions.

Risk assessment presents another hurdle.

Traditional tools such as Moody’s and Dun & Bradstreet credit reports are not available for cannabis businesses.

This lack of standardized evaluation makes it more difficult for lenders to accurately assess a marijuana business’ risk profile.

However, new solutions are emerging to evaluate risk.

Additionally, since marijuana businesses are excluded from federal protections and resources available to traditional businesses, they cannot restructure under U.S. bankruptcy laws.

These laws offer traditional businesses with a structured receivership process to distribute assets and pay creditors when a business goes under.

In the event of financial collapse, cannabis lenders risk being left without recourse unless they proactively appoint a third-party receiver to manage the distribution of assets.

Highly regulated means high risk

A common misconception is that federal legalization would instantly normalize banking for marijuana businesses.

However, even in a legal landscape, cannabis would likely remain a highly regulated, high-risk industry – similar to alcohol, casinos or firearms.

Illicit markets still would pose risks, requiring financial institutions to ensure they accept funds only from regulated businesses.

Moreover, some banks might continue to avoid cannabis entirely, focusing instead on lower-risk sectors.

Ultimately, even in a federally legal market, compliance will remain paramount.

Cannabis businesses will need to prove their adherence to regulations, such as producing safe, clean products and maintaining transparent operations.

As such, fintech solutions that centralize financial data – such as sales, deposits and industry trends – will be essential in helping both lenders and businesses navigate these complexities and build trust in a highly regulated environment.

Regulatory outlook and industry growth

Two potential regulatory developments in 2025 could significantly impact cannabis lending:

1.    Rescheduling hearings

The rescheduling of marijuana has been delayed, with the judge appointed to oversee the hearings putting the process on hold.

2.    Farm Bill reevaluation

A widely anticipated Farm Bill update, whenever Congress gets to it, could address the legal status and regulation of hemp-derived cannabinoid products.

The 2025 Farm Bill update will address the legal status and regulation of hemp-derived cannabinoid products.

This regulatory gray area has made it challenging for banks to work with such businesses.

Expanding cannabis lending

Many financial institutions still associate cannabis businesses with outdated stereotypes of informal, counterculture operations.

However, as more lenders engage with these businesses, they gain insight into their financials, growth trajectories and professionalism.

This exposure helps dismantle misconceptions, demonstrating that the cannabis industry includes legitimate, well-run businesses serving a growing consumer market.

Expanding cannabis lending now not only addresses the immediate refinancing needs of the industry but also fosters long-term normalization in 2025 and beyond, helping both lenders and businesses unlock sustainable growth.

Stacy Litke is vice president of banking and financial services at Bonita Springs, Florida-based Green Check Verified. She can be reached at slitke@greencheckverified.com.