Cannabis Banking Decoded – How to Get a Bank Account

The saying “more money, more problems” could have been written about the Cannabis industry. Without sound banking, POS, or merchant services options, most Cannabis business owners are forced to deal with a whole lot of cash, and all the problems that come with it.

U.S. based Cannabis companies sold $18.3 billion in revenue in 2020. That’s billions and billions of dollars that could’ve, should’ve, and would’ve been in American banks. Instead, much of it sitting in safes, duffel bags, and armored cars, putting Cannabis businesses, employees, and ancillary service providers at risk of theft and fraud. Finding a good banking option for a Cannabis company isn’t easy, but it is possible. 

Let’s take a look at Cannabis banking issues, as well as potential solutions for these obstacles. 

Managing a Business With Cash Is Next to Impossible

Running a business without the financial infrastructures and support that are commonplace in the modern corporate world can be overwhelming. Cannabis companies are at a disadvantage because many are unable to accept credit cards and have limited access to banking options. The vast majority of Cannabis companies’ clientele are forced to make cash purchases. Without a bank account in which to deposit that cash, most Cannabis companies then pay their bills with stacks of money, including vendors’ invoices, employees’ wages, and taxes owed to the IRS.

The challenges that come with having a cash-based business include:

  • Lack of payroll and employee banking options. Access to a bank account allows for Cannabis companies to leverage simple things like automated or managed payroll services. Quick and efficient direct deposits and streamlined payroll options do not exist for many Cannabis companies. Unfortunately, some banks are so leery of the Cannabis industry, there are even complications for the Cannabis companies’ employees. When said individuals are paid in cash or with a check signed by a Cannabis business, it can be harder for the employees’ themselves to open bank accounts, which limits their ability to secure loans, set up investment accounts, and more.
  • Vendor tensions. Some vendors outright refuse to do business with Cannabis companies. Other vendors are hesitant to accept cash as payment, so a money order or cashiers check must be drawn up, which prolongs the time that it takes to pay bills. If there are delays in  payment, overdue invoices could result in late fees or delays in fulfillment for products and services. If the Cannabis company has an outstanding bill with a vendor, that vendor could refuse them service. This sets off a continued ripple effect of issues Stock and inventory levels can be affected, slowing down production, distribution, sales, and revenues. 
  • Accounting headaches. Large quantities of cash also means additional accounting requirements. Cash transactions are more difficult to track, leaving room for error when reconciling sales and purchases. In addition, there are supplementary paperwork requirements. Form 8300 must be completed for any cash transaction totaling more than $10K to one person or organization, whether paid in a lump sum or in a series of payments made over 12 months. Not filing form 8300 in all circumstances where $10K in cash is exchanged could result in a negligence fee of up to $2M. For guidance on correctly filing Form 8300, check out the IRS Reference Guide.

          Pro-Tip: Before paying anyone in cash... even if it is less than $10K, be sure to collect all of the             information required for you to complete Form 8300 should you need to file it--versus having              to chase the vendor down at the last minute.

  • Paying taxes. With a lack of legally allowable deductions or credits, Cannabis companies owe a huge percentage of their revenues to the federal government and local tax agencies (county, city, state, etc). Without a bank account for electronic funds transfers to satisfy tax payments, Cannabis business owners must transport these heaping tax payments and drive for hours to make tax payments when they are due. Taxes end up being paid from duffel bags removed from an armored car that transports these payments all over the place, which is not efficient or safe for the business paying the taxes or the IRS receiving the payment. For those businesses looking to lower their taxable income by questionable means, there is also the issue of fraud that accompanies a cash-based business. The lack of banking access can also make it very hard for the IRS to track all cash sales and serves as a barrier to collection, as the IRS are unable to levy the tax payers’ bank accounts.
  • Because of these complications, and somewhat unfairly, there’s a failure-to-deposit penalty of 10% for paying taxes in cash. Some unbanked taxpayers may find a workaround to avoid this penalty, but a Cannabis CEO would have to work with a knowledgeable accountant to get these penalties waived. If you're dealing with a lot of cash and want to ensure you are compliant and completing the forms required to avoid additional fees and penalties, contact us. We can put you in touch with a professional that can help. If you're an accountant that wants to ensure your Cannabis clients are compliant, become a member.
  • Improper cash management. The potential for human error, skimming, and theft is rampant in a cash-based business. Without the proper processes and systems in place, it can be very difficult to maintain an accurate count of Cannabis companies’ revenues and properly report their cash flow. In addition, most Cannabis business owners don’t realize they are liable for every dollar that goes in and out of their business. If the government suspects there is skimming or cash that is not being accounted for, there are huge penalties and repercussions… up to and including imprisonment. Your business must have cash controls in place not only to mitigate theft, but to show that you are monitoring and accounting for all cash that runs through your business. Otherwise, you will have a hard time proving you are compliant if, and when, you are asked to prove your business is properly reporting cash flows.

As more and more banking options become available for this industry, we will see a radically enhanced financial structure in Cannabis businesses. Ideally this will limit the challenges above, and allow for the development of vendor and employee relations, while establishing processes that improve cash management.

Liabilities Involved with Not Having a Bank Account

Not only is running a cash-based business difficult, it can be dangerous since storing large amounts of cash poses a huge security risk. When you’re generating thousands and thousands of dollars on a daily basis, you become a target for criminal dealings, including theft, robbery, and worse.

Some of the disadvantages associated with massive amounts of cash and no access to a bank account include:

  • Risk of theft. Not to say mistrust of employees is widespread, but a business handling massive amounts of cash runs the risk of theft. Additionally, skimming both money and product is not uncommon. Without appropriate merchant services, inventory, and reporting, cash can easily go missing (which, as we said before, you as the owner are liable for).
  • Risk of robbery. When the general public knows there are usually large amounts of money stored on-site at Cannabis businesses, there is the intensified issue of robbery of the business as a whole. Owners are liable for the loss of any stolen property or cash.
  • Risk to employees’ safety. Individuals who work in Cannabis businesses, specifically retail shops and dispensaries, are targets because of their known possession of cash. Employees’ homes and workplaces are frequently robbed, sometimes at gunpoint
  • Risk of loss during transit. When cash is delivered to make payments, there is always the risk of loss. Even with a bank account, there are some issues with transport. Due to the limited number of institutions that will accept Cannabis companies,  depositors end up having to drive hours each way to handle their basic banking needs. Traveling with cash is risky, even more so when your only banking options are nonexistent or located far away from the business. Owners are liable for all loss, unless properly covered by insurance. Fortunately, insurance is available to cover loss during transit. If you are interested in learning how to insure your Cannabis cash, check out our interview with our resident insurance expert, Summer Jenkins.

This risk isn’t only the burden of the Cannabis businesses themselves; it is shared by any organization accepting payment from the cash-based companies, such as vendors, banks, and even the IRS, as they can then be victims of theft and robbery as well. Establishing safe and efficient banking options for Cannabis companies will mitigate risk for all parties involved in this industry.

How to Get a Bank Account

Can you imagine paying your bills with a backpack full of money? That is the reality for many Cannabis businesses, but it doesn’t have to be, as there are some banking options for Cannabis companies. Throughout the country more than 65 banks, with thousands of branches, service Cannabis companies in states where either medical or recreational Cannabis has been legalized.

Why aren’t more banks accepting Cannabis companies? In a word, compliance is costly. Due to the plant being a Schedule 1 drug, there are due diligence and compliance requirements that banks have to meet in order to service this industry. This often requires banks to implement additional compliance measures. which may require them to purchase additional software and hire specially trained employees to process documents, count cash, etc. Paperwork, audits, and follow-ups are a constant part of the Cannabis banking process, all requiring extra time commitments and funds to meet regulations. .

Many banks need to weigh the cost and benefits of serving this industry before making a decision. Banks that do decide to go for it are slowly and carefully rolling out these programs. Even then, many that serve Cannabis businesses won’t broadcast their affiliation with said clients. Some will even deny serving Cannabis” companies because they are unable to take on a large number of them at once.

What Cannabis Businesses Need to Know About Obtaining a Bank Account

For what it’s worth, it’s totally possible to obtain banking as a Cannabis company, but it’s not easy. You’re not afforded the same level of services and convenience as traditional businesses. To be fair, compliance is still extremely important for these banks and credit unions, as they are technically not allowed to provide services to Cannabis businesses. In order to gain access to banks that WILL serve Cannabis companies, you must have a “secret knock,” or a personal introduction. They won’t provide banking services to just anyone that applies or inquires. Each and every business who banks with these institutions is thoroughly vetted and must pay extra fees. The due diligence required to accept a Cannabis company is often exceedingly intense and expensive. Cannabis companies are still viewed as risky, and bring copious compliance requirements and regulations. Banks do their homework before agreeing to a partnership with a Cannabis business.

Are you looking to connect with a Cannabis-friendly bank? We’ve spent the last several years building a list of banks and credit unions willing to serve this growing industry. Contact us today, so we can make an introduction.

Not All Banking Options Are Created Equal

Be warned: much of the banking that is available is very difficult to work with. Lots of credit unions are offering banking, but their technology is often lacking. Digital accounts, APIs, P2P transactions, and cloud computing might not be up-to-date (or available at all).

Some of the issues we’ve encountered with credit unions include:

  • Funds taking a long time to clear (sometimes more than 7-10 days)
  • Lack of electronic banking services
  • Possible cost per transaction, which can add up quickly
  • Delays in payments, due to systems like BillPay (leaving your money temporarily                            unavailable)

Do your research before deciding where to bank. Ask lots of questions, and don’t be afraid to seek insight from experienced Cannabis accounting professionals. 

How to Manage a Cannabis Bank Account

Securing a bank account isn’t a get-out-of-jail-free card. In fact, having a bank account comes with a slew of complications, including:

  • Increased cost. It’s incredibly expensive to have a bank account. Some banks or credit unions charge a percentage of each deposit, ranging from 2% to 5% of the cash received. Others have exorbitant maintenance fees in excess of $2,000 a month. 
  • Required quarterly audits. Scrupulously maintaining the company’s books is no longer just for a potential state or federal crackdown; each quarter, banks and credit unions serving this niche mandate documentation of the businesses’ operations and accounting. Having a qualified accountant is crucial because the financial institutions usually have countless questions surrounding the submitted paperwork. They are working to remain compliant on their end and cannot afford any oversights on your part. This is tedious and time-consuming, but it is a very real and necessary part of the process.
  • Added accounting burden. To avoid cash-counting errors, we’ve seen banks and credit unions go to extreme measures to track the exact amount of cash received and withdrawn from the Cannabis accounts. In some instances, funds will appear to be coming in and out of the account twice. These double entries are a way to ensure accuracy and compliance on the banking services’ end, but it causes major accounting issues for the Cannabis company. Checking the work of your bank could be a daily task for you or your accounting team.

The complications and frustrations of banking are often alleviated for business owners through a partnership with a Cannabis-trained accountant. These industry professionals are familiar with the technicalities and nuances of the credit unions and banks that are willing to work with Cannabis companies. Still, the issue remains: Cannabis businesses need access to legitimate financial institutions and services. As of 2021, 38 states have legalized medical and/or recreational Cannabis. As more and more licenses are offered, the need for banking options will amplify significantly, as banks will not want to miss the business opportunity and will see it as worthwhile to invest in implementing staff and systems catered toward serving the Cannabis industry. 

Legislative changes could encourage more banks to open their doors to Cannabis companies as well, and there are a few possibilities in the works. The MORE Act, the STATES Act, and the SAFE Banking Act are all pending, and each bill would lift restrictions on banking for Cannabis. 

However, legislation isn’t what’s holding banks back—individual banking policies are. Change is coming, but until more banks are armed with the resources to service Cannabis companies, Cannabis-friendly banking must be carefully and intentionally sought by business owners and ancillary service providers alike. If you are looking for further info on Cannabis banking and/or accounting, you can contact us here!

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