Merchant Advance Blog

Blog Article: High Time for Alternative Lenders?

As the medical marijuana industry expands in Canada, a huge proliferation of new businesses has sprung up to meet the needs of the market. Though legalization of the drug has not yet passed the legislative and social hurdles that many users and advocates would like to see overcome, the business prospects of marijuana dispensaries (often operating in legal gray areas) and head shops that sell no actual cannabis products but offer associated accessories and goods such as pipes and rolling papers, seem to be booming nonetheless – at least if recent trends in zoning activity in Merchant Advance’s home city of Vancouver are any indication. The dispensary boom is causing another set of firms with trailblazing business models to pay attention: alternative lenders.

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Despite the blooming of this “green” industry, Scotiabank and the Royal Bank of Canada have recently released statements indicated that they are actively closing existing accounts, and won’t be providing further account services to companies associated with the sale of marijuana or products related to its use. This has left some business owners scrambling to find alternate arrangements for financing their business growth. Royal Bank also confirmed that it doesn’t provide banking services to companies “engaged in the production and distribution of marijuana.”

The nature of the marijuana marketplace is such that major banks simply have not developed the parameters to organize these businesses into their risk management profiles; based on these actions and statements, it looks as if they are unlikely to do so in the short term. Under the Access to Cannabis for Medical Purposes Regulations, the Canadian federal government has only accredited a small handful of the many upstart companies looking to expand in this field: this reticence, combined with banks’ hesitance to lend to marijuana-industry vendors, is a double-edged sword for the small business community.

Will alternative lenders, whose risk management processes are generally more agile and able to accommodate a wider range of business situations, step in to fill the financing gap for these businesses? In theory, online alternative lenders present an deal opportunity for the marijuana industry to find funding; however, in practice, we too will need time to understand the business models and regulatory policies that surround marijuana and its associated retail environment. As with any emergent market segment, the push for growth contrasts strongly with the need for best practices in management. Alternative lenders should be ready for inquiries from the marijuana retail space, and start developing underwriting policies that are designed to service this increasingly valuable small business marketplace.

 

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