The Hidden Costs Of Opening A Cannabis Business
Finding the right financing for any business can be difficult, but when you’re looking to open one that involves cannabis, things get even more complex. The cannabis business is booming, but starting a cannabis business requires a lot of capital and jumping through a lot of regulatory hoops.
If you are thinking of starting a cannabis business, then you need to be aware of these five hidden dispensary startup costs.
Meeting Capital Requirements
As part of the licensing process, many states require you to prove that you have a large amount of capital before you start. States want to keep people from going bust if they get out-competed or if regulations change, but this means that you have to prove you have adequate capital to keep the business afloat when there is a downturn.
Unfortunately, due to the legal issues, you likely won’t be able to borrow from a national bank. But a bank that is state-specific may be able to provide financing for your cannabis business. States that have voted for legalization, especially for financial reasons, don’t want to cut the industry off at the knees. But they don’t want a bunch of unprepared entrepreneurs to lose their shirts either.
Capital requirements aren’t the only obstacle to starting a cannabis business. You’ll also have to pay for a license. Licenses can range from a few thousand to tens of thousands of dollars. You and your employees may also have to undergo background checks.
There may also be restrictions on where you can open your business. Proving you have a storefront in a location that complies with the law may be a requirement for getting a license.
Getting a license is a pain, but it is what separates legal dispensaries from illegal drug dealers. It’s a necessary, and expensive, evil to stay legal.
Speaking of criminal behavior, dispensaries are targets for thieves because they can resell quality products on the black market. Part of your dispensary start-up costs must include the installation of a security system. Your state’s license requirements may even mandate that it meets certain requirements.
Buying cannabis from the state is expensive. A poor security setup could ruin your business, or even get your license yanked if saving costs on security made you an easy target for thieves.
When you perform your cannabis market search to check on the competition, make a note of asking about which security systems they use. If you’re using the standard for the rest of the market you’ll be in good shape.
An estimated 70% of canna-businesses are unbanked, which means they are operating without the use of a bank’s services. Due to federal laws, many national banks will not touch money that comes from a cannabis business. Should the federal government try to enforce marijuana laws, or if the states overturn their laws, a bank could be accused of assisting with drug trafficking among other charges.
This means that until the legal landscape changes, most canna-business transactions are in cash, including paying utility bills, payroll, and taxes. This isn’t just inconvenient, but there are extra transaction fees when you try to do everything in cash.
The pace of transactions is also slower. There is also makes dispensaries and whoever handles the cash a target for burglars hoping to strike it rich, so extra money must go into security measures to protect each day’s take.
Higher Advertising Costs
Cannabis marketing is also expensive, from finding a company who will make a marijuana web design for your site to finding advertising channels. If you’ve done a cannabis market search, you might have noticed that there are only a few channels that dispensaries are allowed to use to advertise their business.
Even in states where only medical marijuana is legal, people are afraid that children will be tempted by cannabis. This is why there are strict rules on advertising like there are for alcohol and tobacco. Each state has different rules on how you can advertise your canna-business. Quite often they are more strict than the rules for alcohol and tobacco.
This means you’ll have to sink more money into the limited channels you have access to and deal with greater competition in those channels from other cannabis businesses.
There’s no question that running a cannabis business costs a lot of money, just like any other brick-and-mortar business. But these hidden costs can surprise new entrepreneurs who want to jump into the field. Be prepared to talk with your investors on how you plan to handle these costs so they’ll have the confidence to know you’re in it for the long haul.
Is there any good news if you don’t have the cash now? There is! When legalization happens on the federal level, it’s likely some of these restrictions will be lifted and you’ll have an easier entry into the market.