Cannabis Needs To Act Like Normal Business To Unlock Institutional Investment, Experts Agree

“Cannabis should be treated as a normal business.” That’s according to Kevin Hart, CEO of Green Check Verified, who was one of the panelists at IgniteIt’s The IgniteIt Cannabis Capital Conference this past June. The panel dubbed “Capital Isn’t Scarce: It’s Scattered” was moderated by Jennifer Makris, known as the Cannabis Cash Queen; Dotan Melech, founder and CEO of CTrust; and Stacy Litke, VP of banking programs at Green Check Verified, who shared the stage with Makris and Hart at the Chicago Marriott Downtown Magnificent Mile.

The group of experts dived into one of the cannabis industry’s biggest complaints – lack of capital.

Panelists agreed that the capital is available today for cannabis businesses. However, accessing it is a different story, as it requires standardized data, compliance, and a functioning secondary lending market.

Cannabis Needs Normalization

According to Hart, banking is no longer the industry’s biggest challenge. Next up is lending.

Over the years, lending has been fragmented due to a lack of infrastructure in the cannabis industry and market that traditional financial markets rely on, according to experts.

Enter Green Check’s Lending Alliance, which is, according to Hart, already working with loan portfolios worth hundreds of millions of dollars that are headed for the secondary market. Instead of requiring banks to keep every cannabis loan on their balance sheets, it gives them the ability to originate, syndicate, package, and sell loans into a secondary market. That frees up capital so they can continue making new loans.

“The ecosystem, the availability, the infrastructure, the operating system—standard banking for normal businesses—is available for the cannabis industry today,” Hart said.

Litke explained that the Lending Alliance originated directly from conversations with banks. It was created in response to banks that were willing to engage with cannabis businesses but needed support understanding cannabis-specific collateral, regulatory risk, revenue variability, underwriting standards, documentation, and credit evaluation before they could lend.

Compliance As Industry’s Key Asset

In the meantime, panelists shared the same stance on compliance data, identifying it as not just regulatory but a lending requirement as well.

In the light of cannabis rescheduling and regulatory changes around CBD and hemp, financial institutions require increasingly sophisticated visibility into borrowers.

“Data at the detail level—compliance—is more important than ever,” Hart said.

Transparency provides lenders with confidence when underwriting loans. It also attracts larger institutional investors.

However, more loans is just one of many opportunities for the industry. Melech highlighted the creation of a functioning secondary market. Instead of keeping loans on their books, banks should make loans using consistent underwriting standards and documentation, then sell those loans to institutional investors.

This would free up capital, allowing lenders to keep financing new operators. However, only works if the right infrastructure is in place, Melech said. “Originate to sell is not going to work without the infrastructure,” he added, citing some of several asset classes that were on similar paths before becoming institutional investment markets, including non-qualified mortgages after the 2008 financial crisis and SBA 7(a) lending, to name a few.

These markets became institutional investment markets only after developing standardized documentation, independent underwriting, consistent disclosures, objective risk ratings, and standardized representations and warranties, Melech continued.

He particularly emphasized standardization, “not a back-office concern,” but as “the key to unlocking secondary markets.”

Operators Must Become Finance Ready

The discussion also revolved around what cannabis operators themselves must do.

Melech proposed preparing by understanding their own financial profile in advance before approaching lenders.

Hart advised operators to work closely with qualified CPAs to produce financial statements that meet institutional lending standards.