Cannabis Rescheduling And Credit Risk: What Industry Insiders Are Saying

“Rescheduling will definitely help… but it’s not like Bank of America is going to step into lending to cannabis as soon as rescheduling happens,” said Joseph Lustberg, CEO of Upwise Capital at the recent Benzinga Cannabis Capital Conference in Chicago.

As cannabis rescheduling to Schedule III inches closer, industry leaders gathered to discuss the potential benefits and limitations of this change, during a panel called: “Credit Risk and Rescheduling: The Impact on Cannabis Company Borrowing.”

See Also: EXCLUSIVE: Only 27% Of Cannabis Businesses Are Profitable, Economist Says

The panel, moderated by Stacy Litke, VP of Banking Programs at Green Check Verified, covered various aspects of rescheduling from credit risk and lending to competition from larger players.

Credit Risk And Capital Access: Slow Changes On The Horizon

Litke began by addressing the industry's hopes regarding how rescheduling could reduce borrowing costs and increase access to capital.

She prompted Lustberg to share his thoughts on how rescheduling might influence lending. Lustberg, whose company deals with about a hundred lenders in cannabis, acknowledged the potential benefits but stressed, "Rescheduling will help… but the same lenders will still be in the space."

Dan Neville, CEO of Advanced Flower Capital Inc., joined the conversation, agreeing that rescheduling is “credit positive” but warned about the high levels of leverage in the cannabis industry.

“There's a decent amount of leverage, and while some companies can grow into it, it's still a federally illegal business with a decent amount of leverage in the system,” Neville said. He also noted that some lenders who entered the market during previous cycles, especially in challenging states like California and Colorado, are now winding down their involvement.

The Role Of Collateral And Regulatory Hurdles

Litke shifted the conversation toward the practicalities of securing loans, asking about the impact of rescheduling on collateral and bankruptcy protections.

Sahar Ayinehsazian, attorney at law firm Vicente LLP, explained that while rescheduling might help operators better secure financing, state regulations will still present challenges.

"When it comes to cannabis, you can't take control of collateral overnight like you would with real estate," Sahar noted, pointing out that each state's regulatory framework would still dictate how lenders can handle cannabis licenses as collateral.

She further cautioned that even with rescheduling, cannabis operators will need to carefully consider state-specific rules regarding disclosure and collateralization.

"You will have certain states that have unlimited licenses, and certain states that have limited licenses," Sahar said, adding that these variations will continue to affect the value of licenses as collateral.

Tax Relief And IRS Opportunities

Nick Richards, tax partner at Greenspon Marder LLP, discussed how rescheduling could open the door for cannabis companies to negotiate offers in compromise with the IRS.

"This is a big, big, big opportunity for cannabis companies with tax debt to find a way to pay it off in an organized way," Richards said.

However, Richards warned that rescheduling won't automatically solve every tax issue. He advised operators to focus on getting current with their taxes in 2025 rather than paying off older liabilities, cautioning against expecting immediate bankruptcy protections post-rescheduling.

“If you're a borrower that's waiting for rescheduling to look for your capital raise, there's not going to be any difference whenever it happens,” he said.

The Impact Of New Competition: Big Pharma And Alcohol Giants

Litke brought up the issue of potential competition from larger industries post-rescheduling, asking the panelists how they envision Big Pharma or alcohol companies entering the cannabis space.

Sahar responded by highlighting that while larger players may have better financial backing, experienced cannabis operators have years of hands-on experience in a complex regulatory environment.

"You as an operator, especially if you've been operating well in this very particular regulated type of market, have hands-on experience knowing how to survive and exist, which itself is incredible valuable." Sahar also encouraged operators to see collaboration opportunities with these bigger entities.

Neville suggested that alcohol companies, more than pharmaceutical giants, are likely to step into the cannabis market. “Consumption trends are shifting from alcohol to cannabis,” he said, adding that larger companies might find it easier to buy into the cannabis industry rather than build from scratch.

A Step Forward, But Not A Cure-All

As the panel concluded, the experts were unanimous in their view that while rescheduling is a significant step forward, it won't fix every problem faced by cannabis operators.

Lustberg reiterated that businesses will still need to demonstrate growth and stability to attract new lenders.

Finally, Sahar cautioned, “Rescheduling is not going to fix your operational issues that stem from you and from your company.”

Read Next:

• Cannabis Industry Set To Hit $32B In 2024, Says Economist, With Potential To Double In Coming Years

Photo by Wendy Davis