How Cannabis Businesses Can Secure Financing and Find Relief from COVID-19’s Economic Fallout

The ongoing COVID-19 pandemic and its economic fallout has had a far-reaching impact, particularly for cannabis businesses that are largely unable to access federal relief programs due to the continued federal prohibition of cannabis.

Jessica Shraybman, founder and managing partner of Florida-based Shraybman Law, initially advised her clients that federal aid would be difficult if not impossible to come by due cannabis’s Schedule I status, but to her surprise, she has since heard of several companies that have been able to qualify for relief.

For example, she says some companies have focused their applications on the hemp side of their business, which has allowed them to qualify for the Small Business Administration’s Paycheck Protection Program.

State-Level Relief

While federal relief programs may be off-limits to most cannabis businesses, some states are offering aid for which industry participants can apply.

For example, in California, Gov. Gavin Newsom signed a 90-day sales tax extension into law that gives small business owners until late July to file and pay their first quarter sales taxes, and small businesses may keep up to $50,000 of these sales tax payments for a year, effectively using the cash as a no-interest bridge loan. California regulators also announced in May that cannabis businesses with licenses expiring in May and June may request a 60-day deferral of their licensing fee payments.

Florida has granted many of the same extensions, Shraybman says, including extensions on annual reports and other required maintenance documents.

Shraybman also has helped her clients receive extensions on filing deadlines from the IRS and the trademark office, where some hemp and CBD companies have active trademark filings in process.

“It varies from department and agency and state to state, and even obtaining information can be a bit delayed, but we have certainly been recommending to all our clients [that] if there is a hold up or they anticipate any kind of hold up on their end to request extensions,” she says. “In most instances, we’ve been getting them. … It may not necessarily be a resolution to whatever issues they might be facing, but it at least gets them a little bit more time to put together their strategy [and] to talk to their advisers and legal counsel in order to identify … business plans [that need] some restructuring.”

Private Equity Financing

In the wake of the economic downturn, many investors are focused on sustaining existing investments, Shraybman says, rather than making capital injections on new projects.

That’s not to say that securing new private equity financing is impossible; two of Shraybman’s clients, for example, have been able to obtain private bridge financing to help them through this period, but they are well-connected companies that had established relationships with investors prior to the pandemic.

“Right now, I think people are focused more on sustaining the investments that they have already made, which is the case for my clients that were able to obtain some bridge financing from their existing investors,” she says.

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Those that have existing relationships with investors should keep their stakeholders informed and up to date on current business developments.

“Communication has really been the name of the game recently,” Shraybman says. “[Be] candid and transparent with challenges that companies are facing and where they are pivoting or how they are re-focusing their efforts.”

Negotiating Commercial Contracts

Contract issues have been prevalent in the wake of the COVID-19 pandemic, Shraybman says, and the law firm has been addressing many lease-agreement disputes since the crisis began.

“Leases, particularly industrial commercial leases, tend to be very favorable to the landlord with minimal protections for tenants,” she says. “This has been coming up on an almost daily basis for us these days.”

Many of Shraybman’s clients have inquired about Force Majeure (a contract clause that removes liability for natural and unavoidable catastrophes that prevent signatories from fulfilling obligations) and whether it allows tenants to defer rent payments or obtain relief from their obligation to pay rent.

“Unfortunately, sophisticated landlords or landlords that are working with attorneys on commercial leases are very smart,” she says. “Most of the provisions that I see for Force Majeure basically say that it may alleviate all obligations of the parties, except tenants’ obligation to pay rent. So, it’s the one thing that always gets caught in these provisions.”

Shraybman has been assisting landlords and tenants in negotiations to help ease tenants’ financial burdens during these uncertain times, and in some instances, landlords have been willing to defer rent—or at least a portion of the rent payment—for a few months.

Many landlords, however, have their own obligations to mortgages and cannot cover rent payments on their own.

“They’re in a position where they have to pay the mortgage,” Shraybman says. “It’s been a difficult conversation to have, particularly with small companies, but that is the situation.”

These situations, although unfortunate, can be a learning opportunity, she adds. “When you are planning to enter into a relationship, whether it’s a lease agreement, partnership or an investment, have advisers behind you who have the experience and understand the intricacies and the nuances of these relationships to review your contracts and help you negotiate those contracts to better anticipate these things in advance.”

The same goes for distribution chain agreements, she says. The COVID-19 pandemic has resulted in limited supplies or shipments that are held up altogether, and Shraybman has been advising her clients to take a conscious and collaborative approach when structuring and maintaining relationships along the supply chain.

“People are compromising on all sides of these relationships and on both sides of deals,” she says. “Things have maybe slowed down a little bit here and there, but people are thankfully mostly being collaborative and working with one another to just make the best of the situation. Of course, that’s not to say that certain conversations haven’t gone awry because they have and we’ve had to settle some disputes, but thankfully, most of them are being worked out amicably.”

Weathering the Storm

Overall, Shraybman says lean business practices, robust leadership and ingenuity are the things keeping her clients afloat while allowing them to keep their teams employed.

“I’ve just been really impressed with the creativity and the ingenuity that so many of our clients have shown in restructuring their compensation models to make sure that as much of the team as possible can stay employed and people are still able to pay their bills and survive,” she says.

Leadership should be transparent and candid with their teams when difficult decisions must be made, she adds, and companies should seek help when needed from their boards of directors and legal counsel.

“I think that it’s really the most valuable thing that leaders can be doing right now, just communicating and being available and accessible and keeping people informed.”