Weed companies still struggling to get loans from Canada's big banks

Philippe Depault launched Maïtri a year ago with the intention of selling accessories for weed smokers and potentially developing his own brand of recreational cannabis. The Montreal-based company is currently sitting on a 500,000 square-foot greenhouse project while it waits for a cannabis production licence from the federal government. He never figured it would be so difficult to find a bank that would lend him money, let alone open a business account.

“I was refused six times before being approved,” he says. “They pretty much laughed at me. The Canadian context is unique: we have a black market, a grey market with clinics, and a legal medical market. But bankers don’t see the difference between those. They’re not cannabis users. I eventually just loaded my line of credit and turned to my family to borrow money.”

Most big banks have so far shown they are reluctant to do business with the thriving cannabis industry, at least until the federal and provincial bills dealing with legalization are officially adopted. The situation has nonetheless put a damper on the momentum of small businesses that are not equipped to sell stocks on the open market.

The situation, however, could be starting to shift. The Bank of Montreal last week led an equity financing round for the biggest licensed weed producer in the country, Canopy Growth Corporation, leading some marijuana entrepreneurs to believe the big banks are warming up to the industry.

Smaller marijuana companies, however, say they are still having a hard time getting loans from the banks.

‘NO OPTIONS FOR START-UPS’

Six months ago, Philippe Depault finally managed to open a business account by emphasizing the medical nature of his project. He won’t disclose the institution he’s dealing with, lest it change its mind about his company. He’s also recently found a private investor to pour tens of thousands of dollars into his dream.

“There are no other options for a startup like mine except private investment. And I was lucky: I met someone who believed in my dream and who didn’t want to take 90% of my business in exchange for capital.”

Founder of Vert Médical, Dany Lefebvre says his struggle to obtain financing since his company launched in 2013 eventually led him to sell the business. Vert Médical was still waiting on a permit to produce medicinal cannabis when he sold the company to Canopy Growth, which also got a majority stake in Lefebvre’s other company, Hemp.ca, as part of the deal.

“We were about to collapse,” Lefebvre says. “I spent so much time waiting and being refused by the banks. There is a lot of education to be done, particularly within the financial sector.”

U.S. FEARS

The American context might also explain some Canadian banks’ reluctance to invest in the cannabis industry. Even though eight states have legalized the recreational use of weed, it is still illegal at the federal level. And since banks are under federal jurisdiction in the U.S., financial institutions can be accused of money laundering if they agree to deal with the industry.

On January 4, U.S. Attorney General Jeff Sessions announced the cancellation of five orders issued during Barack Obama’s presidency to alleviate the application of the federal law which considers marijuana a hard drug. Needless to say, that spooked financial institutions even more.

Even Canadian giant Aurora, a licensed producer from British Columbia that opened its first greenhouse in Montreal in October, faced the banks’ conservatism. “We had problems with the banks because their culture is based on what’s happening in the United States, where it’s illegal,” says Director of Quebec Affairs Andrea Paine. “They love our money, but it’s still very difficult to get credit.”

The Business Development Bank of Canada, a Crown corporation that finances small and medium-sized businesses, also distances itself from this line of business. “It’s still too early to say what will happen, because the bill is still under review,” says their spokesman Jean-Philippe Nadeau.

Farm Credit Canada, however, another Crown corporation, deals with four licensed cannabis producers. “We have a very cautious approach,” says Vincent Giard, Vice-President of Quebec Operations for the country’s largest agricultural lender. “We only work with companies in the medical field.”

HEAVY TRADING

Professor of Finance and Investment Management Specialist at McGill University, Ken Lester notes that while everyone wants to invest in this growing sector, banks find themselves in a very peculiar position. “They’re afraid to admit to their customers that they don’t want to follow the trend and that they’ve made the wrong decision for their shareholders,” he says. “But if they partake, there’s a risk they’ll make the news and be perceived as the new drug dealers.”

Lester points out the hypocrisy of these institutions, who have no problem cashing fees from stock market transactions related to the green rush. “If you call your broker at one of the major Canadian banks to buy shares of an authorized producer, he’s not going to say no.”

Dany Lefebvre also addressed National Bank’s CEO about the issue during a business event at the Drummondville Centrexpo in Montreal. “He said: ‘That’s not where we stand and that’s not where we’re going.’ But I know that a lot of people who work for this institution trade cannabis-related stocks.”

At least two financial institutions contacted by VICE News saw a record number of transactions during the week of January 2, in part due to trading in the cannabis industry. “I know, because it’s all that was traded during the week of January 2,” says a broker at National Bank.

'HUGE RISK'

TD Bank also experienced an unprecedented volume during the same week. The number of customer transactions actually caused the institution’s trading platform to momentarily crash. “We are seeing a continued increase in stock trading related to the cannabis industry,” explained Mathieu Beaudoin, Director of Internal and Public Affairs. ”

Ken Lester believes the big banks’ reluctance drives Canadian companies to go public. There are roughly 70 publicly traded marijuana companies in Canada, and just 20 privately held ones. “Everyone wants to throw money at these companies right now,” says the McGill professor. “Stocks are being traded at a higher value than they should, so cannabis companies are getting money at an excellent price, with little dilution.”

Another avenue is to approach private wealth management firms. These “shops” are happy to lend money, albeit at much higher interest rates. “They’re seizing the opportunity at the moment, and they’re making a lot of money,” says Lester. “The stars are aligned for them right now.”

Philippe Depault also denounces the fact that, faced with these difficulties, some entrepreneurs are turning to the black market to finance their activities. “The risk is huge. They are banking on their transition to the legal economy after legalization passes. It allows them to raise capital and build a customer base. But it’s money laundering, and I’m not interested in that.”

Simon Coutu is on Twitter