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How Banks Can Manage Marijuana-Related Business Risk in PPP Lending

 

On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (the CARES Act),  was signed into law to provide over $2 trillion of emergency funds to help address the impact of the coronavirus pandemic. Of this, $349 billion has been allocated for small businesses to enable them to continue offering employment and to provide economic stability during the crisis. 

However, not all businesses are eligible.

The Small Business Administration (SBA) has made it clear that Paycheck Protection Program (PPP) business loans are currently unavailable to Marijuana-Related Businesses (MRBs), whether Tier 1 (direct) or Tier 2 (indirect). As commercial banks and credit unions review the influx of PPP loan applications, they might consider looking out for MRBs hidden within the mix.

Are Any Cannabis Businesses Eligible for PPP Loans?

In order for a business to be eligible for a PPP loan, it must meet the criteria set out by the SBA.  But under the 2018 SBA Policy Notice, banks and credit unions cannot approve loans for businesses engaged in illegal activity under federal, state or local law. The 2018 Notice set out three main categories of MRBs who are currently ineligible for any SBA assistance:

  1. “Direct Marijuana Business” — a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. 
  2. “Indirect Marijuana Business” — a business that derived any of its gross revenue for the previous year from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to support the use, growth, enhancement or other development of marijuana. 
  3. "Hemp-Related Business” — a business that grows, produces, processes, distributes or sells products purportedly made from “hemp” is ineligible unless the business can demonstrate that its business activities and products are legal under federal and state law. 

So despite the criteria for PPP loans being met by many MRBs (examples of the criteria include being classified as a “small business concern” or having 500 or fewer employees), at this time it seems that only duly licensed and legal hemp businesses would currently be eligible to apply for a loan. Although "the entire farm sector says that SBA paperwork excludes them", which would presumably exclude hemp businesses.

We may see this change in the event of a new or expanded coronavirus relief package, as marijuana businesses seek access to loans, and several Congressmen are pushing for changes. But for the moment, PPP lenders must be prepared to spot ineligible applicants. 

How Can Financial Institutions Identify Cannabis-Related Risk?

The size and extent of the US cannabis industry means that it is likely some MRBs may feel tempted to apply for PPP loans during the coronavirus pandemic to help weather the current crisis. For banks and credit unions, access to a comprehensive source of marijuana industry participants allows them to make reliable and informed decisions quickly, at a time when speed is of the essence. 

CRB Monitor is helping SBA PPP lenders achieve this goal by providing a “single source of truth” on relevant MRBs and their beneficial owners. Through our industry-leading corporate intelligence, you can:

  • Conduct quick marijuana-related business and individual name searches.
  • Point and click to understand business-to-business and business-to-beneficial owner connections and relationships.
  • Gain access to detailed company and beneficial owner profiles.
  • Print “profiles” to PDF for record keeping and reporting.

We are currently offering complimentary access to our online database of MRBs and beneficial owners through the duration of the PPP to help you identify potentially ineligible applicants.

Contact us today for your free trial.

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