Cash Management for Cannabis Industry

In the absence of federal legislation, cannabis entrepreneurs are very restricted when it comes to clear-cut cash management options. For the most part, anyone involved in the industry is aware that most financial institutions refuse to accept cannabis-industry cash due to the federal regulations put in place. This leaves participants with only two options; investing it in expanding their business or with the option of holding onto it.

The SAFE Banking Act was introduced in March of 2021 and passed by the House on April 19th, 2021. It has since then been received in the Senate and read twice. Congressional leaders are now working to revive this bill with key negotiators. It will become the tool to ultimately legislate protection measures for financial institutions that work with state-legal cannabis businesses. Many supporters and interested parties are pretty optimistic that, with leaders in congress assigning essential lawmakers to start negotiating the final version of a broad manufacturing and innovation bill throughout the past few days.

Despite the fact that the SAFE Banking Act is generally recognized as a bipartisan bill, none of the Republican members of the current conference committee have signed on it as cosponsors - as a result, that party is likely to oppose it in the negotiations. The SAFE Banking Act has been passed for the fourth time by the House of Representatives. Nevertheless, the bill never advanced in the Senate's previous session. Now, the remaining question is, "When will the Senate discuss the bill?" The harsh reality is that we still don't know.

Officials from the federal government have remarked that the absence of cannabis-friendly financial institutions has also posed a public safety predicament that warrants critical intervention. Cash is king is something we commonly hear in the cannabis industry. Cash, however, is also a significant liability. Vast sums of money at the premises pose a significant threat to more than just the staff and shoppers involved in the purchase, but also to the general public. Keeping cash available is the equivalent of placing a massive bullseye on your shop. How will you keep your profits safe, monitor your income, and then use it to cover company expenses and your vendors?

Aside from it not being safe, it is also not financially smart to store so much capital in cash. Consider this, the cash you hold onto is losing value every second it sits there. If you are not earning interest on cash and it is losing value over time, then holding onto it would not be a good call. You should expect your costs to rise between 2% to 3% per year based on inflation on its own, presuming all stays the same, then you'll need to augment the value of your money by the same proportion. Take a moment to consider that. If you can't grow your cash by the inflation rate, you'll be worse off economically. To summarize, your money's value is eroding over time if it's just sitting there.

As a legal cannabis entrepreneur, if you find yourself really questioning yourself as to where to situate your money, then insurance expert Jasnik Parmar has just the solution for you. Parmar suggests putting that money into a life insurance policy which would then become a tangible asset that banks can legally lend on.

Just like Parmar explains in his article, "This is made possible because these profits aren't from a marijuana enterprise. These are just the payouts from an insurance policy, which is a legally valid agreement. Unlike cannabis money, this asset may be borrowed against, either from a financial institution using the insurance as security or, in some situations, via a direct loan from the policyholder to the policyholder. The money can be transferred anywhere – including a bank or brokerage account – and utilized for any reason once it originates from an insurance policy rather than a cannabis business."

How does borrowing from your insurance policy work? The life insurance company maintains funds deposited into the life insurance plan, which exceeds the death benefit. After a few periods, the policy has earned a cash value.

The cash value, which operates like a savings account, is one of the main components of a full life insurance policy, alongside the face value and death benefit. This tax-free money deposited can then be borrowed against once the money invested increases. However it's also vital to note that the insurance loan is not really withdrawn from your death benefit but rather borrowed against it, with all of your contract serving as collateral.

In contrast to a credit loan or loan from a bank, life insurance loans have really no impact on your credit score and actually require no authorization because you are borrowing the money from yourself. When taking out loans from your plan, you will not have to justify how you'll spend it, so it could be used for everything from obligations to vacation costs to an economic necessity. Therefore, that loan is also not classified as earnings by the Inland Revenue Services Department, and thus it is tax-free.

Read more in Andy Obermueller's article on MJBiz on avoiding your cash losing value as a cannabis entrepreneur and how to maneuver your money into the bank through a life insurance policy.

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