A large number of Washington State marijuana business license applicants have received the green light from the Liquor Control Board to finish building out their facilities, and cash from financiers is starting to hit the table as applicants rush to complete construction. The cannabis lawyers at my firm have been inundated lately with requests from clients for promissory notes and security agreements to formalize these loans.
These loans give rise to one central question: which assets of the marijuana business can lenders secure as collateral for the loans?
In other businesses, the lender can secure virtually anything and everything to which the borrower will agree. This might include capital equipment, intellectual property, inventory, accounts receivable, cash in the bank, etc. Inventory is the gem lenders seek the most, as a business’s collective inventory is generally its most valuable asset.
But when the inventory is marijuana banks and other lenders have a problem because they are not legally allowed to seize or possess the asset — the marijuana held in inventory. This is because Washington law provides that individuals may only possess one ounce of marijuana and may not possess any marijuana plants and only businesses licensed by the Liquor Control Board can possess larger quantities. This means that if a marijuana business defaults on its loan from a bank, the bank can seize all of the equipment and cash it secured, but it cannot not seize the marijuana itself.
Does this mean that marijuana inventory cannot be used as collateral in any way? Not exactly. A security agreement is a contract, and the parties have broad allowances in what they can try to do. If marijuana being collateral is going to make or break your million dollar loan, there are ways to extract value from it. One idea is for the bank or individual lender to force the borrower to sell its inventory to a different licensee upon default. There would be significant tax ramifications, a ton of paperwork, and several other challenges, but it is doable. All it takes is creative negotiating and parties on both sides of the table being willing to jump through fifty hoops to complete the deal.