With legalized marijuana at an all-time high, many entrepreneurs consider getting into the business as a “sure bet.” But, getting into the legalized marijuana industry isn’t as simple as it sounds. This week we’re discussing the barriers to having your own marijuana business and what you should think about before you put any money down.
For many, starting a new business means taking a trip to the bank for a small business loan. But for those looking to start a marijuana business, medical or recreational, finding access to banking can be challenging. Because marijuana is still illegal on a federal level, many financial institutions fear the monetary fines, and/or criminal charges for helping marijuana-related businesses. Ultimately, banks tend to avoid them altogether. For the business, this means no bank accounts, no lines of credit, and no loans. But, even if you are able to get banking support, many businesses find their savings account to be quite low due to the tax rates for US marijuana businesses.
Section 280E, a more than 30 year-old tax code, disallows businesses that sell federally illegal substances from accepting the normal corporate income-tax deductions. Without these tax deductions, marijuana-based businesses face an effective tax rate as high as 90%.
Regulations can be tough for any small business. For small marijuana businesses, the burden of regulations can be even harder. Because federal jurisdiction allows for the sale of marijuana in states that have legalized it, businesses can theoretically get by without federal prosecution. But, due to the strict and varied regulations state-by-state, many marijuana entrepreneurs find they have a complete lack of understanding as to what they actually need in order to open a marijuana business. Many suggest that those opening a new marijuana business hire a lawyer to work with you regarding proper documentation and licensing for your state and municipal districts.
Marijuana investors may see green, but it might just be the plants themselves. Expansion and reinvestment can claim a lot of your revenue, making the management of your cash flow difficult. And, if an insurance company is willing to take on your business, the premiums alone will bring your bottom line even lower.
More and more states are legalizing marijuana every year. Believe it or not, this could lead to a large oversupply. Take these Canadian statistics for example. According to varied estimates, annual domestic demand in Canada could reach around 800,000 kilograms. But, when the dozens of licensed producers are running fully-funded, they could easily top two million kilograms by 2020 or 2021. Without a reasonable resource for exporting, where does the additional product go? Until the market can begin to self-regulate, product margins may be too varied to have much consistency.
Narrowing down your consumer base may prove to be more time consuming than you thought. Hey, doesn’t everyone that likes marijuana like the same kind of marijuana? Thoughts like that will ensure your business never gets off the ground. Take the time to understand who your local customer will be. Are they older or younger? Do they tend to prefer smoking or edibles? Does the majority of your clientele work full-time or part-time? All of these factors and demographics are the stepping stones to a successful business. Once established, the fun part is finding new and innovative ways to differentiate your business from other marijuana establishments. The reward will be worth the work, but it is a lot of work.
Are you thinking about starting a legal marijuana business? Have you found any insurmountable hurdles along the way? Contact @MMDOTCOM and give us the rundown!