Recent changes in cannabis laws in many states have created significant business opportunities for a large number of entrepreneurs. Dispensaries have popped up in many communities, and grow operations are found alongside traditional farming enterprises in many parts of the country. Cannabis tourism is rising rapidly as well, and some niche markets are also making their marks in their business community, such as bakeries that produce cannabis-infused baked goods.
However, as diverse as these sectors of the industry may seem at first glance, they all have one thing in common — because cannabis remains illegal on a federal level, cannabis businesses are unable to use banks or get credit in the traditional fashion. All transactions have to happen in cash, and this can cause serious challenges for those in the industry.
Nonetheless, cannabis businesses are thriving, and the industry is on track to take its place as a major player in the global economic scene, and the momentum will undoubtedly gain even greater traction when federal prohibition inevitably comes to an end. When that happens, the nation’s banks will be more than happy to throw open their doors and welcome cannabis cash inside. Until, then, however, those in the industry have to continue to be creative about their finances while still staying within the letter of the law. Regardless of whether weed is legal on a federal level, for instance, the IRS still has its hand out for its cut, and those in this industry need to be particularly mindful of toeing the line when it comes to keeping current on tax payments.
Instead of simply writing a check to the IRS quarterly the way other businesses do, cannabis businesses tend to pay off their state and federal tax obligations in cash. However, that involves making a personal appearance at tax offices carrying large amounts of tax. Some of the big players show up to make their tax payments flanked by bodyguards and may even go so far as to arrive via armored vehicle, but that isn’t a realistic approach for the average small-town dispensary owner.
To complicate matters further, some people in the cannabis business can’t get bank accounts at all, while others are allowed accounts that come with heavy restrictions. Those who can’t get bank accounts can always take their cash to their local Post Office and exchange it for money orders to use to pay their taxes and other financial obligations, but this involves a cumbersome process that can also be dangerous — no one really wants to be seen at their local Post Office handling thousands of dollars in cash on a regular basis.
Not All Banks Are on the No-Cannabis Bandwagon
Banks in some states are beginning to take cautious steps toward providing cannabis businesses with banking services. Certain banks in Colorado and Washington state are allowing long-term customers to have checking accounts, but these financial institutions are keeping things on the down-low for now. The issue for banks is that because the money that is generated by cannabis businesses can be classified as an illegal transaction under federal banking laws, which means that it can’t be FDIC insured. The small number of banks that will accept cannabis customers are doing so at risk of losing their FDIC status, would effectively put them out of business. Although the U.S. Justice Department looks the other way in states where cannabis use is legal, concerns about changes that may occur as the result of shifts in the country’s political climate are throwing a valid obstacle in the way of more banks jumping on the green bandwagon.
Trying to open an account at a federal bank is a complete waste of time, but cannabis business owners might have success at smaller credit unions and regional banks. Some of these institutions are willing to take chances because the end of prohibition seems inevitable, and they’d like to get in on the ground floor when all that green money starts flowing into banks. Most banks that will agree to open cannabis business accounts prefer to hedge their bets and only accept very few though, and some are reported to have waiting lists of up to two years.
However, getting a loan at a bank that accepts cannabis customers is pretty much out of the question at this point unless that customer is planning on starting an ancillary business. Ancillary businesses are defined as those that support the industry but don’t directly handle the product itself. An example of an ancillary business might be a cannabis travel agency, a manufacturer of greenhouses, or a distributor of lighting systems used in growing cannabis plants. Anything that doesn’t involve directly touching the plant can be considered an ancillary business.
Green entrepreneurs should be upfront when approaching banks to open an account. Trying to pass it off as another kind of business could be construed as money laundering by overzealous authorities. This also saves time by preventing scenarios where the nature of the business isn’t disclosed from the start and the bank decides not to move forward after finding out it’s a green business. Also, some green entrepreneurs and their employees have found their bank account abruptly closed with no warning by the issuing banks.
Tips for Operating a Business on a Cash-Only Basis
The reality for most green businesses is that they’ll be operating primarily on a cash basis until and unless federal prohibition ends. Fortunately, that hasn’t stopped the industry from thriving. Several forward-thinking private investors are currently offering to fund cannabis businesses, taking up the slack usually filled by traditional banking institutions. These aren’t without conditions, however — although they vary per investor, it’s common for them to want to see a solid credit score on the part of the business owner, a history of being in business for at least six months to a year, and a steady monthly revenue of $10,000 or more. It’s also important to discern between true angel investors, who charge reasonable interest rates and set deliverable repayment goals, and those operating essentially as loan sharks, with nearly impossible interest rates and hard-to-meet repayment schedules. It pays for those considering going into the cannabis industry to do some serious shopping around.
Some green entrepreneurs sourced startup cash from friends and relatives. Although this can work in certain situations, borrowing money from personal connections comes with its own set of risks. Lifelong relationships have been known to end over business deals that haven’t worked out as planned, so if you decide to go the friends and family route, make sure everyone’s protected by a firm legal contract. It may seem cold and unfriendly to ask for a legal contract, but there are plenty of those who didn’t whose businesses and relationships might have been salvaged if they’d done this.
In the Retail Environment
Because today’s consumers are trained to pay for transactions using cards, many first-time customers are surprised when discovering that they must use cash at the dispensary. Businesses can help circumvent this by posting highly visible signage stating that it’s a cash-only business. Many are having ATMs placed onsite so that customers who are caught off guard can still move forward with their purchase. As consumers become more acclimated to the unique situation involving green businesses, using cash just becomes part of the deal.
Onsite ATMs can either be lifesavers or problematic nuisances. It’s handy to have a quick source of cash that customers can easily access — after all, once they walk out the front door in search of an ATM somewhere, there’s a strong possibility that they won’t be coming back. However, retailers must fill the ATM with cash regularly as well as estimate how much cash they will need daily. Although these aren’t difficult tasks, they add to the long list of administrative chores that come with operating a business on a cash-only basis.
The biggest problem that onsite ATMs pose is that they create a security risk that only increases the chances of a cannabis business being targeted by thieves. Having one onsite may also result in higher premiums for business insurance.
The majority of cannabis retailers take in thousands of dollars in cash regularly. Keeping large amounts of cash on the sales floor is not recommended, Casino-style smart registers designed to handle large amounts of cash are probably the best strategy for cannabis businesses at this time. These provide back-office capability to monitor individual cash drawers, allowing them to know when one is getting too full so they can remove some of the cash to a secure environment such as a safe. At the end of the day, all cash except for what’s needed for the next day’s operating costs should be moved to an offsite location.
Cannabis businesses are bound by the same labor laws as their traditional counterparts. Paying employees, however, can be a challenge in situations that lack a regular business bank account. It’s perfectly legal to compensate employees in cash, but the business nonetheless has to withhold the appropriate taxes. Some cannabis business owners have designated employees as 1099 contractors so that they can be responsible for their own taxes, but this course of action is not recommended because the business can be charged with misclassification of employees. Most green businesses find that weekly cash payments work out best for everyone.
Fortunately, most vendors who deal with cannabis businesses understand the unique restrictions concerning traditional payment processes involved and are ready and willing to accept cash payments. However, this means that someone with access to enough cash to settle the bills needs to be onsite during designated delivery times, and it also means that the business must keep enough ready cash on hand to make the payments. One of the downsides of this business is that getting a line of credit directly through individual vendors is impossible, but this also comes with a plus side — cannabis businesses may be less likely to go into debt than others who rely on credit to fund their operations.
What’s in the Future?
Welcome changes may be on the horizon for everyone involved in the cannabis industry. A federal bill is currently in the works designed to make traditional banking options less risky for both financial institutions and green entrepreneurs. The bill has recently passed in the House of Representatives and is headed toward the Senate. Because the bill has bi-partisan approval, chances are very good that it will be passed by the Senate. Even if it doesn’t make it this time, green money is flowing all over many parts of the country and is set to continue the momentum, so it’s only a matter of time before big money wants an invitation to the party.