It’s easy to get excited about the cannabis industry when you hear that legal cannabis sales in the U.S. grew 30 percent in 2020 to a whopping $22 billion, outpacing the $17.5 billion spent on wine. If you’re a savvy, experienced businessperson, you might mistake that kind of booming market with an opportunity to turn a quick profit.
But there are a few aspects of operating a business in the cannabis industry that are dramatically different from running a typical business. Here are three hard truths about cash flow that people need to understand before even considering launching a cannabis business.
Hard Truth 1: You Need Considerable Liquid Funds to Start and Operate a Cannabis Business
Running a cannabis business might make plenty of money, but none of it will be “easy money.” Whether you’re interested in producing, processing, or selling products, cannabis businesses are phenomenally expensive to start and maintain. You could be looking at hundreds of thousands to millions of dollars for:
- initial operating licenses,
- ongoing compliance expenses,
- property purchases or leases,
One quick aside about property: if you’re leasing your facility, don’t be surprised if your landlord tries to back out or substantially raise your rent upon learning that you’ll be operating a cannabis business. It’s not a fact you can hide; in many states, the intent to operate a cannabis business must be written into your lease. Landlords tend to panic at the mere mention of cannabis due to higher insurance costs and most banks’ refusal to mortgage a property used for a cannabis business. We’ve seen landlords raise prices five- or sixfold, knowing that cannabis business owners often can’t afford the expense or the delay of relocating their operating license, starting the licensing process over in a new jurisdiction, or having their license encumbered by an eviction.
Taxes are a considerable expense as well. Those states that have legalized marijuana have done so largely to pad their coffers with high taxes on cannabis proceeds. In Washington, for example, marijuana products are subject to a 37 percent excise tax. But while the government is happy to take your tax dollars, don’t expect to enjoy any tax write-offs for your business. Because cannabis is still federally illegal, cannabis businesses aren’t eligible for standard business deductions or other tax breaks.
So, while cannabis-related businesses may be lucrative, they’re also disproportionately expensive to operate. Money that flows in will flow back out just as quickly. And that river of funds—flowing largely in the form of cash—creates its own set of problems.
Hard Truth 2: Your Business May Not Be Able to Open a Bank Account
Here’s a question no other legal, taxed industry has to grapple with: where are you going to store your income? We mean, quite literally, where are you going to keep your bags full of cash? How will you keep your proceeds safe, track your money, and use it to pay your bills and your suppliers?
These somewhat bizarre questions arise because cannabis business owners can’t count on traditional banking services. As of the end of 2020, only 515 banks and 169 credit unions nationwide provided banking services to marijuana-related businesses. Many cannabis businesses are therefore forced to operate without bank accounts, checks, credit cards, loans, or lines of credit. In the marijuana industry, cash is king. Unfortunately, cash is also a serious liability.
Businesses that operate primarily in cash—and lots of it—have to grapple with the risk of robbery and pay for security measures to protect their earnings. At the same time, they don’t have the safety net of a bank line of credit or the ability to float payments on a credit card.
Hard Truth 3: You Need to Get Comfortable Handling That Volume of Cash
You know that movie scene where someone opens a briefcase full of crisp stacks of bills and everyone’s eyes light up with desire and greed? If you’re in the cannabis industry, you have to lose that sparkle. You are going to encounter a lot of piles of cash, and that’s not really a good thing.
Keeping track of cash funds and maintaining meticulous business records of cash earnings and spending are incredibly difficult, especially as cannabis businesses are already under a regulatory microscope. How will you earmark sufficient funds for taxes and other irregular expenses? Logistically speaking, how will you pay your rent, utilities, licensing fees, suppliers, and employees? A solid, leak-proof cash flow system is crucial.
But tracking and managing funds aren’t the only challenges. If you’re paying in cash, how are you going to get to the point of sale? Unless you have a private plane, trying to fly anywhere with a briefcase full of money is a good way to get your legally earned funds confiscated. Driving creates its own set of risks, especially for multi-day trips.
All of this cash management takes considerable time and effort, so most cannabis businesses need at least one or two employees exclusively dedicated to counting cash, making money drops, and obtaining money orders and cashier’s checks. That, of course, makes them extremely vulnerable to misappropriation of funds and employee theft; as much as 90% of monetary and product loss in the cannabis industry has been attributed to employee theft.
Fortunately, there are better ways to manage money in a cannabis-related business. For example, businesses can establish a corporate structure with two related entities, one of which owns the cannabis product and the license while the other owns the real estate, machinery, and equipment and pays the business’s employees. That ancillary entity—shielded from the cannabis business itself—can access standard banking amenities, removing many of the day-to-day difficulties of handling cash. Even so, the compliance hurdles of the cannabis industry ensure that there’s no such thing as a quick and easy profit for a cannabis-related business.
If you aren’t deterred by the challenges of operating in a heavily regulated industry burdened by legal inconsistencies and historical stigma, give us a call. We can help you learn how to better manage your cannabis business’s money and recommend ways to mitigate some of the risks.