The U.S. Small Business Administration (“SBA”) published a Policy Notice that went into effect April 3, 2018 clarifying that marijuana businesses, and even some companies that do not actually touch the plant but service those in the cannabis industry, cannot receive federally backed loans. The SBA rules already preclude lending to businesses directly involved in the cannabis industry, but the new SBA rule precludes lending to any business that is indirectly doing business with a marijuana related entity.
The Policy Notice provides the following definitions for “Direct Marijuana Businesses” and “Indirect Marijuana Businesses,” both of which are ineligible for SBA financial assistance:
- “Direct Marijuana Business” — a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to personal use and medical use even if the business is legal under local or state law where the applicant business is or will be located.
- “Indirect Marijuana Business” — a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its 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. Examples include businesses that provide testing services, or sell grow lights or hydroponic equipment, to one or more Direct Marijuana Businesses. In addition, businesses that sell smoking devices, pipes, bongs, inhalants, or other products that may be used in connection with marijuana are ineligible if the products are primarily intended or designed for such use or if the business markets the products for such use.
The Policy Notice also prohibits lending to certain business involved in the hemp industry, unless the business can show that its products are legal under federal and state law. The Policy Notice provides the following definition:
- “Hemp-Related Business” — a business that grows, produces, processes, distributes or sells products purportedly made from “hemp” is ineligible unless the business can demonstrate that its business activities and products are legal under federal and state law. Examples of legal hemp products include paper, clothing and rope.
As part of the same Policy Notice, the SBA also clarified that SBA borrowers cannot rent office space to marijuana related businesses, which now includes both Direct and Indirect Marijuana Businesses. The Policy Notice reiterated that a borrower cannot lease space to a business that is engaged in any activity that is illegal under federal, state or local law. Further, lenders were “advised that, during the life of the SBA-guaranteed loan, a borrower may not lease space to the ineligible businesses described above because the collateral could be subject to seizure and because payments on the SBA loan would be derived from illegal activity. If a borrower does lease to an ineligible marijuana-related business, SBA District Counsel should be consulted to determine what action should be taken.”