Fluresh LLC Obtains Largest Cannabis Commercial Financing Ever
By: Scott F. Roberts and Louis Magidson
It is no secret that one of the largest obstacles for business owners in the cannabis industry is financing. The investors are certainly there at every level, from the individual angel investor, to medium-sized state investment firms, to large-scale commercial banks and blue-chip investment lenders. The issue arises at the large-scale banking level because those banks and investment firms are federally regulated entities – and cannabis is a federally illegal substance under the Controlled Substance Act (CSA) – meaning that despite numerous state legalizations, those entities cannot invest in any business that works with, or in any way touches, cannabis.
Nevertheless, the finance industry is nearing a point where it can no longer ignore the mountainous profits that could be garnered by investing in cannabis. This is evidenced by a growing number of state financial institutions that are not FDIC backed and as a result are increasingly willing to lend to cannabis companies. The chief practical concern amongst financial entities is risk, and obviously there is no larger risk than the possibility that an entire business, or even an entire industry, could be shut down by the federal government as an illegal operation selling an illicit products. But as more states legalize either medical or recreational cannabis programs, this fear seems to be dissipating and local banks are taking notice.
The signal for better days to come regarding cannabis financing came in the form of the largest commercial financing deal ever completed for a cannabis company. The deal, which is backed by an undisclosed “federal regulated commercial bank headquartered in southeast Michigan,” is a $48 million financing deal.
The deal is composed first of a $25 million Bank Note for aggregate gross proceeds with a variable interest rate set at 5.75% currently with a maturation date of December 2024 and secured by Fluresh property in Adrian, MI. The second part of the deal is $23 million in the form of private debt consolidation on its Grand Rapids, MI property, allowing Fluresh to reduce its number of creditors to just this unnamed southeast MI commercial bank. This is crucial for the business as many smaller private investor loans usually involve much high interest rates that can cripple growth when payments are due.
Assuming its deal with Fluresh LLC goes well, it would only be logical for this mystery commercial bank to extend financing to more cannabis operations, but they may be hesitant because doing so still technically remains an illegal activity for federally regulated financial institutions. Currently, this means that for every transaction this federally regulated bank makes with an entity or business that works with cannabis, they must create a suspicious activity report which may restrict the transaction or in the very least make it less attractive to the bank. Ultimately, this entire situation dynamic begs the question: What is the federal government waiting for when it comes to permitting commercial banks to work with cannabis?
SAFE Banking Act
Aside from blanket legalization, The Secure and Fair Enforcement Banking Act (SAFE Banking Act) is the simplest solution to cannabis banking concerns at the federal level, as the 62% of American voters who think marijuana should be legalized wait for Congress to legislate.
The SAFE Banking Act is an order from Congress to the Justice Department and Financial Crimes Enforcement Center (FinCEN) to stop policing financial institutions for the sole reason that they are suspected to be invested in cannabis operations. Such legislation would be game changing for the cannabis industry as it would allow the full potential of the American finance industry to fund painfully profitable businesses – painful for federally regulated banks because such businesses are usually the exact type of entities commercial lenders want to loan to.
So, What Is The Government Waiting For?
The simple answer is that it is not waiting, but instead is being delayed by its own internal processes and a small group of staunch conservative senators that refuse to make the popular choice. The SAFE Banking Act has been passed by the US House of Representatives a total of 6 times either as a standalone bill or as a part of a larger bill, the most recent of which came as a standalone in April of 2021 with 321 votes for the bill. The bill has been floating in limbo for well over a year, but the US Senate has still not introduced the bill for a vote.
This may be part of a larger strategy for senators that do not believe there is currently enough support for the bill, but the lack of transparency regarding the status of the bill leaves many of its supporters frustrated and confused as to why there has been no Senate action.
The hopeful takeaway from this record-setting commercial financing award to Fluresh is that the proverbial floodgates are giving way to a deluge of FDIC-regulated lenders eager to get into business with profitable entitles within the cannabis industry. You’ll often hear professionals in many commodity-based industries discuss what it takes to become the ‘Coca-Cola’ of that industry. No matter the business features to mold such marketing success, there is no mistaking Coke’s accomplishments without admiring its large-scale commercial lending.
Currently, the shift is happening slowly, as only forward-thinking lenders, who refuse to see cannabis as an unseemly risk, are forecasting that federal legalization is imminent. Investing in/lending to successful cannabis businesses will be a no-brainer decision once either:
- The SAFE Banking Act is passed, or
- Blanket federal legalization occurs.
For now, it remains within the jurisdiction of banks with gumption and vision.
For business owners in the industry, this loan represents a goal to strive for – consolidating debts owed to smaller private lenders and getting rid of the exorbitant interest rates they were forced to accept from those lenders. It poses a holy grail financing option as a saving grace for a small business. For now, however, it is a waiting game – waiting to see if the SAFE Banking Act will pass the Senate or if the industry will have to wait for blanket federal legalization. Waiting on Washington is like watching paint dry, but with public sentiment so strongly in favor of legalizing cannabis, the wait should be a short one.
For all your business, legal, regulatory, or compliance questions in relation to the cannabis industry, Scott Roberts Law is a boutique cannabis business law firm uniquely well-equipped to get your cannabis business growing. Schedule your consultation here to get started today.