Cannabis lending doesn’t necessarily mean higher credit risk

Despite the ongoing discrepancy between federal and state cannabis laws, the number of financial institutions serving cannabis businesses in states with legal cannabis programs has been increasing steadily. While most bankers initially entered the market to generate new sources of low-cost deposits and non-interest fee income, they have also discovered that the compliance and due diligence processes they implemented on the deposit side can be leveraged to mitigate credit risk. As a result, lending appears to be the next big opportunity for financial institutions to generate revenue and gain a competitive advantage in this fast-growing market.

Although lending to cannabis businesses introduces new risks, banks and credit unions serving this industry and passing their compliance exams have a key advantage: a deep insight into their customers/members. The added layer of transparency and data-sharing required to serve this industry successfully enables these financial institutions to apply judgmental decision making to evaluate lending requests and make informed decisions that support the cannabis company’s business goals while protecting the financial interests of the bank.

Deirdra O’Gorman, CEO of DX Consulting and Empyreal Logistics, is an expert on banking and compliance for highly regulated industries. She works with financial institutions across the country and offers her perspective on the lending opportunity.

 

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