DON’T LET YOUR PROFITS GO UP IN SMOKE
By Benjamin Kelly
Lovejoy & Kelly PS
Washington State’s legalization of marijuana in November 2012 opened up a slew of possibilities for businesses and entrepreneurs, both experienced and budding. Overnight, there was need and opportunity for pot-related businesses from retailers to suppliers to growers. Many rushed to fill the void, and a multitude of new businesses were formed.
But those who did wade in encountered many obstacles. Principal among the hurdles was marijuana’s continued status as a Schedule I drug under federal law, illegal for any purpose. As a consequence of dealing in what the federal government deems an illegal narcotic, pot sellers found that banks, wary of violating drug laundering laws, were unwilling to take money from them. Without access to financial institutions, the new businesses were rendered almost entirely ‘cash only.’
A cash-only business presents several risks for credit-issuers. Cash is very difficult to locate relative to other types of assets. The proverbial (or actual) money-in-the-mattress leaves no trace and cannot necessarily be accounted-for by a third party. It is unlikely to be captured in a garnishment, and no independent party can provide a statement of deposits and withdrawals.
So, what can a credit-issuer do to protect itself when extending credit to a pot-based business? As always, due diligence is key. A credit-issuer must take stock of a company’s available assets, and the assets of any principals. One or more of those principals should be required to sign a personal guarantee. A principal is more likely to have real property or other locatable assets than their cash-only business. Be sure that your application captures the type of information that will be helpful in any later, post-judgment efforts.
Legalized marijuana is fast becoming big business. There are indications that more and more banks are willing to accept money from pot-related companies. However, the industry remains disproportionately cash-only. Creditors must be aware of this fact and should identify and take the necessary precautions so that they do not get left holding the bag.