Marijuana Business Magazine February 2019

Marijuana Business Magazine | February 2019 84 M odern-day loan sharks are cir- cling the cannabis industry. Predatory lending—a practice that gained special notoriety during the Great Recession—can cripple or sink a cannabis business owner who is launching or expanding a company. Predatory loans typically involve a lender who relies on unfair or misleading tactics. The result: A borrower is spurred into accepting a loan with a sky-high interest rate or other terms that are good for the lender—but bad for the borrower. Cannabis businesses are especially vulnerable. Many banks and other traditional lenders are reluctant to serve marijuana companies because the plant is illegal under federal law. That, in turn, has spurred MJ business owners to seek out alternative forms of finance—including predatory lenders who charge interest rates of 20% or more. “This has happened for quite some time in the industry,” said Evan Eneman, CEO of Ello, a Los Angeles financial, tax and advisory services firm serving MJ businesses. Moreover, the practice shows no sign of going away. “I think predatory lending will con- tinue to be prevalent in the cannabis industry because of the federal illegality,” said Nick Kovacevich, CEO of KushCo Holdings, a diversified ancillary cannabis business in Garden Grove, California. Below are expert tips for how to avoid predatory lenders. They range from being wary of overseas lenders to knowing the warning signs of a questionable operator. CRIPPLING COSTS While not necessarily illegal, predatory loans can cripple an upstart cannabis business desperate for money. “How can you grow your business if you add a 30% loan to your costs? If you are paying 30% on a loan, you can’t afford to hire anyone or expand your business,” said Denver lawyer Donald Emmi, who represents marijuana and hemp clients. Emmi has firsthand experience with predatory lenders. “I just killed a deal for one of my clients who was trying to get a loan,” he said. Evan Enamen says a lack of cash flow can lead cannabis business owners to fall prey to high- interest, predatory loans. Courtesy Photo Cannabis business owners are particularly vulnerable to predatory lenders, given that traditional funding sources such as banks are wary of serving marijuana companies. A predatory loan carrying an unusually high interest rate or other unfavorable terms can cripple or sink a cannabis company. Business owners can steer clear of predatory loans by doing the following: • Hang up on strangers—think cold callers—pitching loans. • Be wary of overseas lenders, be- cause it can be difficult to trace the exact source of the funding. • Read the fine print on loan documents and be alert to high- interest loans that are secured through a borrower’s business assets or require an upfront fee. • Consult a lawyer, accountant or consultant who specializes in the cannabis sector and can recommend reputable lenders. • Approach the lender if you believe your cannabis business is caught in a predatory lending scam. See if it’s possible to revise the terms; alternatively, try to refinance. Shark Bait