I previously wrote about how the cannabis industry should prepare itself for tough financial times. Capital is increasingly hard to come by unless you find yourself in a newly launched state like New York, perhaps. But once a state cannabis program is relatively mature, it’s only a matter of time before it’s a race to the bottom: operators are trying competing with the illegal market on incredibly thin margins. If you’re in a place like California, you’re also facing high taxes and a lack of consistent enforcement.
Cannabis companies aren’t the only industry actors that must be mindful of lean financial times. Investors and financiers, too, must be cautious. Lately, as industry capital requirements increase while profits plummet, we have tackled more and more financing deals that involve a variety of collateral to secure the cash lent. Specifically, lenders are trying to collateralize the most valuable cannabis business assets of all: cannabis licenses, inventory and accounts receivable.
A critical fact to understand is that cannabis security interests don’t operate like other collateral under the Uniform Commercial Code (“UCC”). Below is my lists of dos and don’ts.
Do: follow the UCC
To have a valid security interest, you still need to
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