4 Banking Strategies for a Cannabis Company

4 Banking Strategies for a Cannabis Company

Although securing a bank account as a cannabis business can be challenging, it’s not impossible. As more and more states legalize cannabis, you can expect an increase in financial options. Seeking the advice of experts in cannabis banking will help speed up the process and alleviate initial roadblocks. The partners at Northstar Financial Consulting Group, are here to offer helpful advice and critical insights. 

Here’s some background on the history of cannabis banking, and why opening a bank account isn’t as easy as you would hope. 

In 2013, James Cole, former Attorney General, created a memo that helped federal prosecutors interpret the Controlled Substances Act (ACT) in states where cannabis was legal. In effect, the memo protected legal cannabis states from the federal cannabis ban. This is one reason certain banks won’t touch cannabis money – because cannabis is still illegal at the federal level. 

Choose Your Bank Wisely

Federal banking institutions won’t take on any cannabis clients. It’s too much of a risk to put their billions of dollars of assets on the line. Plus, the compliance burden is too large and they don’t want to risk having their FDIC insurance revoked. 

Rather than wasting your time at a federal bank, meet with local community banks, regional banks, and credit unions to see how they can help. These banks have the resources to maintain the proper due diligence and compliance and have much to gain with cannabis clients. 

Here are a few other strategies that can improve your chances of establishing a bank account for your business: 

Use a Simple Business Name When Filing Your Articles of Incorporation       

This document is what proves the existence of your company, from a legal standpoint. It’s also the document banks look over while they consider giving your business a bank account. Needless to say, a name like “420 Vape Shop” or “Dank Weed LLC’ is not the best of choices. This can raise red flags and cause unwanted attention. Instead, we suggest you select a more discreet business name. You can use a general name or your initials followed by Corporation, Limited, Group, Company, etc. Conservatism and professionalism go a long way in the eyes of bankers.  

Create Two Distinct Bank Accounts

Once approved by your bank of choice, make sure to set up one account strictly for cash deposits and the second account for paying business expenses. This will help mitigate the chance of having a S.A.R (suspicious activity report) filed or getting your account frozen. This report or freeze can occur in the first account because of the large volume of cash activity. So, having a second account is a good business practice. It allows you to keep paying your bills and taxes on time while you work to manage affairs with your second account. 

If a S.A.R. or freeze is issued, it’s advised to have all your financial documentation, city and state permits, licenses, expense reports and the like, in order. Having this documentation organized and accurate can help your business maintain its status as an account holder.

Another possible scenario after opening your business bank account is getting audited. This is another good reason to make sure your bookkeeping is solid, and your metrics and compliance are in place. This is no easy task, yet something that needs to remain impeccable. Having a team of specialized cannabis accountants and financial consultants on your side could be essential to the status of your bank accounts and the overall viability of your company.

Develop Good Rapport With Your Banker

Lastly, try to consider your banker a friend, or an ally, as opposed to a business transaction. This can pay back in dividends down the road and might even reduce the possibility of a S.A.R. getting filed on your accounts. Be as courteous, friendly, transparent and professional with your banker as possible. A little bit of effort goes a long way.

To learn more about cannabis banking from Northstar’s expert cannabis accountants and consultants, contact them at (424) 274-3188 or info@nstarfinance.com.

Should I Outsource My CFO Service

Should I Outsource My CFO Service

Cannabis companies generally build out their business starting with the founder(s), then the staff, such as growers, trimmers, and budtenders, who help in the revenue-generating efforts. Until your business is running smoothly and sales are consistent, companies won’t typically fill back-office positions, like hiring a Chief Financial Officer (CFO). But, the best time to hire a knowledgeable CFO with cannabis expertise is during a company’s growth stage. 

 

Why a Business can Benefit from Hiring a CFO 

A CFO can assist in securing the financial health and stability of a company. The CFO takes charge of key financial aspects of running a business, like maintaining accurate cash flow records, making financial projections, advising on tax compliance and more. 

Having financial data that is accurate and organized helps a company make better business and operating decisions. Moreover, a CFO helps cannabis companies stay compliant even with a strict regulatory landscape.

Here are some examples of what a CFO can do for your company:

  • Business and strategic planning – looking out three to five years
  • Financial projections and development of key performance indicators (KPIs)  
  • Build a pricing model
  • Prepare an operating budget 
  • Track and advise on cash-flow management
  • Handle the financial components of a merger and acquisition 
  • Create investor materials and manage relationships
  • Help meet financial reporting requirements and deadlines
  • Manage the balance sheet by tracking debt and equity positions and key terms

 

When to Hire a CFO 

Non-cannabis companies typically bring on a CFO when they’ve achieved substantial revenues, or need help preparing for an IPO. But, these set of circumstances don’t necessarily apply to a cannabis business. Why not? Well, there are several reasons. First, the cannabis industry is new and continually evolving. There are many legal hurdles with limited funding opportunities from financial institutions. Since the accounting, tax, and regulatory requirements can be challenging to stay on top of, the need to hire a CFO is actually required much sooner for a cannabis business.  

Before companies consider hiring a CFO, they usually first take into account their funding status. If a company raised outside capital, it could be facing external pressure from investors to hire a CFO for strategic reasons. Yet, if a company is self-funded, the founder(s) have to decide whether they want to personally take on the role of CFO. If they have enough business acumen and financial experience,  they might decide to do so. But, if they don’t, bringing on a qualified CFO could prove to be necessary. 

A full-time CFO doesn’t come cheap. Their yearly salary can range anywhere from $150k to $300k. For a start-up company, this expense can consume a large part of their budget. Until a company has a consistent revenue stream, it could be hard to justify this expense. But, on the same token, a CFO could be a key component in the strategy to increase revenue or raise more capital. So, what can a company do in this  situation? One option is to outsource the CFO service from a financial consulting group, like Northstar. 

An outsourced CFO can work part-time on a flexible schedule, and be there to support your financial operations with efficiency. The cost of outsourcing your CFO is generally a lot less money than hiring a full-time employee. 

He or she can be the catalyst that propels your business forward and enables you to make a lot more money. Besides the examples discussed above, a CFO also advises on one of the most difficult and complicated issues a cannabis business faces – cash management. The majority of revenues are cash, and banks make it very difficult to open accounts. A company must find ways to work around these challenges, and a CFO knows how to work around all kinds of issues.

An expert CFO already knows how to set up bank accounts and can easily assess how much money should be in the account for electronic payments. Furthermore, for companies without banking, a CFO can advise you on where to keep a safe, how much to keep in the safe, who should have access to it, etc. 

Besides the accounting, tax and regulatory guidance of an outsourced CFO, they also provide operational and strategic advice. This frees up more time for you to focus on running your business without unnecessary interruptions. 

If you’d like to discuss the many advantages of working with an outsourced CFO, contact Northstar Financial Consulting Group. We provide a full-service Accounting and CFO solution for cannabis businesses looking for a strategic financial consultant and ally.