With all the different types of loans being offered during COVID-19, it can be hard to understand what type of loan might be right for your small business. Cannabis businesses pay federal and state income taxes, but the options for relief during the Coronavirus are limited. Before we discuss the options for marijuana-related businesses, we should identify the different types of loans under the Cares Act.
The Payroll Protection Program or PPP loan is a forgivable loan and is probably the most attractive loan for any business because it is just that, forgiveness. You do not have to pay back the loan as long as you are using it for payroll purposes. The EIDL Loan will provide up to $10,000 in relief to small businesses and the SBA Express Bridge loan will provide up to $25,000 to small businesses quickly. The last option is for businesses that already have a loan with the SBA. This program would allow you to defer payments through December 31st, 2020 if you had an existing loan prior to March 1st, 2020. More information can be found at SBA Loan Options.
The SBA has set some strict guidelines when it comes to federally backed loans in the cannabis space. However, there is still a lot of grey area on what qualifies as a cannabis-related business. We do know that cannabis businesses that touch the plant, meaning cultivators, dispensaries, and processors, are ineligible for SBA loans at this time.
For ancillary businesses that work with them, such as marketing companies, attorneys, payroll services, banking institutions, security companies, etc., the language is a little less specific. Verbiage like “may be ineligible” and “is determined on a case by case basis” leaves many questions for business owners struggling to keep people employed.
Let’s look at the 2 main classifications that can determine if your business may be eligible.
Loans for Direct vs Indirect Cannabis Businesses
Direct Cannabis Business: Federal law prohibits the distribution and financial transactions related to the sale of cannabis products. This unfortunately means that a business that gains revenue from the direct sale of cannabis will be ineligible. This can include dispensaries, processors, growers, and does apply to both medical and recreational businesses.
Indirect Cannabis Business: Funds derived from or that support the end-use of marijuana may be ineligible for the SBA financial assistance. This can include companies that sell smoking/vaping accessories, companies that sell lighting equipment & packaging, or companies that advise or give legal services to direct cannabis business. The nature of the business will determine if the company is eligible. Some ancillary business that provides services to the marijuana industry may qualify for relief from the SBA but are examined on a case by case basis.
Next Steps for Direct Cannabis Businesses
There is some good news for Direct Cannabis Businesses who seek an SBA loan. Recently many trade organizations and governors are lobbying congress to allow marijuana-related businesses to be included in future rounds of financial assistance due to COVID-19. One recent example is the Emergency Cannabis Small Business Health and Safety Act promoted by Earl Blumenauer and Ed Perlmutter. Numerous U.S. senators have given their support to allow marijuana-related businesses to receive financial assistance under SBA.
Next Steps for Indirect Cannabis Businesses
If you fall into the Indirect Cannabis Business category, you may have options now. In speaking with legal counsel on this subject over the past few weeks, I have learned that if you are not directly selling the product and you generate some of your revenue from other non-cannabis related businesses, you stand a good chance that your loan would be accepted.
The worst that can happen is your application would be denied. Make sure your application is truthful and is filled out completely to give yourself the best chance of being approved. Falsifying or hiding information on what your business does can get you into hot water.
Information is changing daily so get your applications in early and submit to as many lenders as possible to have the best chance of being approved. I have also found that large “too big to fail banks” will give preferential treatment to larger businesses, so working with smaller independent banks or credit unions may give you a better chance.
Looking Ahead
Recently, Congress passed an additional $480 billion stimulus bill to tide over small businesses that missed out on the first round. The proposed bill has no change in the guidelines for marijuana-related businesses, so most likely marijuana-related businesses will have to wait and see if future rounds will allow them to participate.