Cannabis retailers usually do not have an extensive debt record when applying for credit, creating a niche that CTrust is trying to fill with a specialized score to inform lending.
CTrust's recently launched Cannabis Trust Score, or CTS, considers financial data as well as ongoing regulatory and operational changes that affect the cannabis industry.
"We're hoping that these institutions will view us as a trusted third-party nonaffiliated objective data source that is able to provide the intelligence they need to build their loan policies," said Dotan Y. Melech, CEO of CTrust.
Cannabis businesses share traits with more conventional businesses that are considered in both the CTS and traditional credit scores, including revenue, inventory and fiscal history. However, Melech said the CTS also considers "assets, structure and character," of a cannabis-related business when formulating a score, providing a more comprehensive analysis of cannabis-specific businesses.
In an email, Will Bowden, CEO of Michigan-based Grasshopper Farms, said that his cannabis farm had challenges obtaining loans, which prompted it to seek out private fundraising and credit unions as primary lenders.
Since cannabis sales were a longstanding illegal practice — and remains as one in certain states — some operators have transitioned into the legal market using similar business practices, Bowden said. Even financial institutions that are allowed to loan to cannabis businesses often reconsider lending.
"You have a lot of operators who transitioned from the black market to the legal market and some have come over and continued to do business in the same way," Bowden said. "That has increased poor business practices — not illegal, but just bad — so that increases risk when it comes to lending and making sure any investment is secure."
The CTS addresses these issues for cannabis businesses that have feasible, sustainable business models and are in need of credit, Melech said.
"Banks can use it to monitor companies [searching for a cannabis market] that have deposits and would like to qualify for a loan," Melech said.
CTrust hopes to assist both financial institutions and cannabis-related businesses by serving as a conduit between each. Financial institutions will get thorough and reliable evaluations of cannabis businesses and cannabis businesses will gain additional access to loans if their score is reasonable, Melech said.
Despite concerns that scores may negatively impact a cannabis business, Melech said the score will only be accessible for cannabis businesses until they choose to publicly disclose it and can potentially assist with any operational corrections they may not be aware of.
"The score is their property, it's not to be disclosed to anyone other than them. They consent to it. … If nothing else, they'll know where they stand," Melech said.
Several cannabis companies and lenders have been able to utilize the score prelaunch, Melech added. Bowden did not disclose his CTS, but he said the report will be essential to Grasshopper Farm's coming expansion.
Both Melech and Bowden said they hope CTrust's new technology will bring an added level of legitimacy to cannabis businesses and open up discussion for access to federally regulated lenders for cannabis businesses. But still, the federal barrier to entry for cannabis businesses remains a looming problem for larger financial institutions.
Until cannabis is either rescheduled or federal laws significantly change, federally chartered banks are faced with a wall impossible to scale in providing loans to cannabis businesses.
"Until there's a rescheduling, obtaining traditional banking loans is going to be a significant hardship for plant touching operators," said Tracy Gallegos, a partner with Duane Morris — a Philadelphia-based law firm, referring to cannabis' classification as a Schedule 1 controlled substance, which exposes banks to potential money laundering investigations, which prevents most banks from lending to cannabis businesses.
However, there are some efforts to allow cannabis businesses to acquire loans from federally chartered banks despite existing restrictions. The Secure and Fair Enforcement Regulation Act, or
One of the senators to sponsor the updated bill last year was Jeff Merkley, D-Ore. In an email, Merkley said passing the SAFER Banking Act "remains a top priority" and that he believes "Congress must end the cannabis cash economy that is dangerous for communities in Oregon and across the nation."
"Legal cannabis businesses need access to the same basic financial services as other small businesses to protect their employees, their customers, and their business," Merkley said.
But until such a law is passed, there are looming issues that will cause even institutions that are allowed to lend to cannabis businesses to hesitate, Gallegos said. "Having a company like CTrust provide a credit score is an indicator of credit worthiness, but it won't do anything to solve any of the issues that the banks are facing in terms of the banks being penalized for engaging in business with what the federal laws still consider an illegal activity," Gallegos said.
Despite these hurdles, as cannabis becomes a more prominent industry, banks will be forced to reckon with it, Melech said.
"Some of them have already announced publicly that they are entering the space," Melech said. "Banks are either in it at a limited capacity or considering expanding into it because it's a great opportunity for sure. It's profitable. It's growing. It has all the right ingredients to be considered as a new asset class."
