US: California lender license requirements

Cannabis businesses need money, and lots of it, to be operational. Being mostly startups, operating profits are not enough to sustain their business. So cannabis businesses take on outside capital generally in one of two ways: taking on debt from cannabis lenders or bringing in equity investors. Due to industry volatility and a crash in the price of flower, many folks who would have otherwise bought into a cannabis company may want to limit the risks of owning a potentially troubled company and lend money instead. But these potential lenders must be aware that California imposes licensing requirements on many types of commercial lenders, including cannabis lenders.

California law requires finance lenders to obtain finance lenders licenses. This is a general legal requirement and does not only apply to cannabis lenders. The licenses are issued by the California Department of Financial Protection and Innovation (DFPI). DFPI's license process is complicated and requires background checking. In other words, it's not a simple process. And violating these laws can lead to monetary fines or even imprisonment.

A "finance lender" is defined to "include any person who is engaged in the business of making consumer loans or making commercial loans." The business of making consumer loans or commercial loans may include lending money and taking, in the name of the lender, or in any other name, in whole or in part, as security for a loan, any contract or obligation involving the forfeiture of rights in or to personal property, the use and possession of which property is retained by other than the mortgagee or lender, or any lien on, assignment of, or power of attorney relative to wages, salary, earnings, income, or commission." A commercial loan, in turn, is defined as "a loan of a principal amount of five thousand dollars ($5,000) or more, or any loan under an open-end credit program, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes." Consumer loans are generally defined as loans for household or personal purposes.

For the purposes of this post, the article is really only focused on commercial loans made to cannabis businesses. Cannabis lenders making these loans generally will be required to get licenses absent an exemption.

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