Tuesday January 12, 2016
There’s no doubt about it, starting your own cannabis business can be a great way to shape a strong financial future. The industry is growing rapidly and bringing in billions of dollars’ worth of profit every year. According to Forbes, most cannabis entrepreneurs are able to climb out of the red within only a few years of starting, which proves that success is for the taking in the canna-biz.
But starting a cannabis business involves more than planting a few seeds and reaping the money tree harvest. Unlike other start-up companies, cannabis businesses have a unique set of hurdles they must overcome in order to be successful. From non-standard business loans to marketing restrictions, cannabis businesses must adhere to strict policy restrictions lest their business go up in smoke.
Here are some of the most common hurdles cannabis business owners must face:
Difficulty Finding Business Loans
Marijuana is federally classified as a Schedule I narcotic which sits unfavorably with any federally-insured banking system. Whereas most small business owners might seek small loans from FDIC-insured lenders, cannabis businesses won’t have such luck.
To find cannabis business funding, many entrepreneurs are turning instead to private loans (with a higher interest rate), equity-based loans (which take into account a business’s current worth) or asset-based loans that require some form of collateral. For businesses with a unique angle to pitch, angel investors offer an opportunity to not only finds investors, but to help new business owners get the training and leverage they need to succeed.
Issues with Money Storage
Financial institutions are not only reluctant to lend money to cannabis businesses, but they are reluctant to take their money, too. This has forced many cannabis businesses to operate on a cash-only basis which poses a huge security risk.
Thanks to the the thousands of dollars’ worth of cannabis products dispensaries sell daily, transporting large sums of cash at once is commonplace. Employees regularly have to buddy up just to go to their cars safely, armored vehicles are required for monetary transport for many dispensaries and all bills and employee salaries have to be paid for in cash.
Restrictions on the Business Itself
Cannabis businesses can’t open up in any ol’ commercial location. State- and city-wide restrictions prevent them from setting up shop near residential and school zones and limit the hours the business can stay open.
There are also excess tax burdens for cannabis business owners as outlined in Section 280 E of the federal Tax Code. The provision, passed in 1982, bars anyone from claiming any business expenses related to the production or distribution of federally-illegal goods. Because cannabis is still illegal on a federal level, cannabis businesses are not allowed to claim basic business expenses such as supplies, employee salaries and building remodels. According to Fortune Magazine, this extra tax burden translates to an effective tax rate of between 40 and 70 percent, significantly more than the average 35 percent that most other business owners pay.
Marijuana businesses cannot advertise their products or services to the general public. In fact, they are prohibited from advertising anywhere that may be exposed to minors which prohibits billboards, television and many online advertisements. Cannabis businesses are also prohibited from advertising on sidewalks parks or any other public space, which even limits the store’s ability to advertise on their own property.
Cannabis businesses are also restricted from advertising on traditional online spaces like display ads, social media ads and other forms of paid advertising. Though the concern surrounding cannabis exposure to impressionable youth is valid, these marketing restrictions make it difficult for small business owners to establish their presence within the industry.