SBA Anti-Cannabis Lending Policy Creates Obstacles for Non-Cannabis Businesses

By Cozen O'Connor
Source: lexology.com

The U.S. Small Business Administration (SBA), a U.S. government agency created to support small businesses and entrepreneurs, updated its lending policy to prohibit lending to marijuana and hemp-related businesses — and to businesses that work with them. The policy is effective April 3, 2018. It is available here.

The new policy guidance clarifies that businesses that derive revenue from marijuana-related activities or that support the end use of marijuana (directly or indirectly) are ineligible for SBA 7(a) and 504 loans (the two main types of SBA loans). People who want to form a business that would sell products or services to or lease space to a cannabis business would also be ineligible for an SBA loan.

Under the new guidance, the following businesses are now ineligible for SBA loans:

Direct Marijuana Businesses — growers, producers, processors, distributors, or other sellers of marijuana or marijuana products regardless of the amount of such activity. The lending prohibition applies even if the business is legal under state or local law.

Indirect Marijuana Businesses — businesses that derived any gross revenue in the previous year (or, if a startup, projects to derive any gross revenue for the next 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. Businesses that sell smoking devices, pipes, bongs, inhalants, or other products that may be used in connection with marijuana are ineligible if the product is primarily intended or designed to be used in connection with marijuana or if the business markets the product for such use. Examples of disqualifying sales include sales of lighting or hydroponic equipment and smoking devices, as well as testing services.

Hemp-Related Businesses — growers, producers, processors, distributors, or other sellers of products purportedly made from hemp. These businesses are ineligible unless they can show that their business activities and products are legal under federal and state law. For example, paper, clothing, and rope are legal hemp products.

Any business that has an SBA loan and derives revenue from a marijuana business should review its loan documents to see if doing business with a marijuana business would cause a breach of any representation, warranty, or covenant or an event of default.

This is the second deterrent that the Trump administration has recently put in place for the cannabis industry, following Attorney General Jeff Sessions’ reversal of the policy protections for state legalization of marijuana in January 2018.