Have you ever wondered why six months and even up to a year can go by after cannabis becomes legal before a dispensary opens up?
Legal cannabis dispensaries face a variety of challenges even before they open their doors. It’s not just as simple as applying for a business license and taking out a loan. Legal cannabis dispensaries need to jump over several different hurdles before they can even celebrate their first day of business.
If you are considering opening a legal cannabis dispensary, or you just want to know what the holdup is, take a look at these five reasons why opening a legal cannabis dispensary can take so long.
It’s All in the Fine Print
While a law might have just passed in your state that legalized cannabis, the process of going from zero to opening the doors of your dispensary can take months. Because there is currently no federal framework for a legal cannabis business, companies have to negotiate laws by state. It’s all down to the fine print of the law and what it requires to license hopeful dispensaries.
The state of Illinois makes for a great example of this. Illinois recently became the latest state to allow for the legal sale of cannabis products for recreational use. Despite the law being on the books, individuals hoping to open up dispensaries are learning just how hard that can be. There tend to be much tighter legal constrictions and ones that are much more enforced, when opening a cannabis dispensary than with other lines of business.
Even though Illinois had a legal medical cannabis community well before recreational sales were legalized, individuals are going to have to wait at least six months before recreational dispensaries will start to open up. This is despite the fact that existing medical dispensaries can now sell recreational cannabis products from January 1st, 2020. New dispensaries have to go through a lengthy and detailed application process before they can open their doors.
This has been true in state after state. When a new state legalizes recreational cannabis the trend has been for retailers to have to start a lengthy application process before they can open their doors. In Illinois, this has meant that new businesses have to plan their operations out to the letter. This includes everything from the daily operation, to estimated costs, to making sure the layout of their store complies with state law. This level of scrutiny is something that new dispensaries should plan for as they put their business plans together.
Navigating the maze of state and local legislation for opening a dispensary is just one of the reasons why dispensaries take so long to open. There are also some federal-level concerns for new cannabis businesses.
Opening a Company Bank Account
Besides the lengthy and complicated application process, this is one of the most difficult parts of opening a legal cannabis dispensary. Cannabis is still a Schedule 1 substance under the federal Controlled Substances Act. This means that from the perspective of the federal government, cannabis is still just as illegal as much more dangerous substances. For companies that operate on a federal level, this can pose a problem.
This is a particularly sticky issue for banks. One of the big problems is that taking money from even a legal cannabis dispensary can be considered money laundering from a federal perspective. This opens the bank up to a combination of a federal investigation and potential asset seizure and is why most banks have shied away from handling the legal cannabis industry. The good news is this is all beginning to change.
When cannabis legalization first started in the United States there was a very wild west vibe to how money was exchanged. Individuals who started their businesses early and even individuals who are opening new businesses in states that have recently legalized cannabis stories about carrying around tens of thousands of dollars in cash during their daily business routines. Thankfully, specialty banks that cater specifically to the legal cannabis industry have started to open up and even some older banks have realized that they can work with the legal cannabis industry.
However, there are some trade-offs here that add to the list of reasons why opening a legal cannabis dispensary can take so long. The main way these new banks have found processing money from legal cannabis companies is to be able to prove that 100% of the money coming in is from legal sales. For the budding cannabis entrepreneur, this means that not only do you have to keep track of every transaction but also who’s conducting the transactions, who’s counting the money, and meticulous details about all money coming in and out of the business.
This also means higher costs for businesses which only increase the length of time it takes to open. Banks catering to the legal cannabis industry charge their customers upwards of $1,000 in some cases to maintain their accounts. From the banks’ perspective, these costs help cover the additional personnel required to oversee the complicated state and federal regulations around legal cannabis sales. The good news is as more states legalize cannabis these additional fees are expected to drop. The tough news that might add to the length of time it takes to open a legal cannabis dispensary is that finding a bank to hold your revenue is just the start of working with banks.
Finding Lines of Credit
Every business needs a line of credit. Most startups were financed by some type of loan. Getting the credit to open up a legal cannabis dispensary can be even harder than opening up a bank account. The difference here is how federal legislation relates to banking and loans for the cannabis industry.
If a bank loans out on a to a legal cannabis startup there is a potential that those assets can be seized by the federal government. This includes the collateral that the loan is based on. This has caused many mainstream banks to be shy about loaning money to the legal cannabis industry. Thankfully, there are a few workarounds for people looking to start their legal cannabis dispensary.
While some banks have started loaning money to the legal cannabis industry, many of these loans are being handled by independent startup lenders. These are companies that specifically cater to the legal cannabis industry but often come with higher fees and interest rates than traditional business loans. There are a few other types of loans to consider that work for legal cannabis funding.
One of the most effective types of loans that can work with the complicated laws around legal cannabis sales is a home equity loan. Since these loans use a home as collateral, banks are much more willing to give them out with less scrutiny.
Regardless of what kind of loan the startup chooses, the lack of a robust offering of traditional business loans means that individuals looking to open a legal cannabis dispensary are going to have to face much more complicated choices than other businesses.
Any good business plan should start with a clear knowledge of how much you’re going to sell your products for and how much money you’re going to make off of them. this is another complicated point that slows down the opening of legal cannabis dispensaries. In addition to the difficulties above, legal cannabis dispensaries also have to compete against the “grey market.”
It’s no secret that legal cannabis tends to be more expensive than illicit sales. Complying with cannabis law naturally creates more overhead costs that drive prices up. How many customers will move to the legal industry for peace of mind others will still stick with their old suppliers in the now grey market. This creates a secondary cannabis industry that can be difficult to compete with.
New cannabis dispensaries face this problem much more head-on and then those and states that have been legal longer. In states like Colorado, the illegal cannabis industry is increasingly robust and even has a strong tourism presence. This allows dispensaries to better plan their costs and decide which areas of the market are going to target. For new dispensaries, more time needs to be taken to plan out costs and how they are going to price cannabis sales in states that previously had no legal market.
The Grey Areas of “Legal” Weed
As the legal cannabis industry begins to become increasingly established in the United States, it’s contact with the so-called “grey market” will only increase.
The cannabis grey market is a mixture of legal and illicit storefronts. This can include everything from otherwise legal retailers who purchase their cannabis from illicit sources to fully under-the-counter operations. These grey market retailers another reason why the legal cannabis industry is often slow to start in any given state.
From the customer’s point of view, one of the biggest difficulties when working with a legal cannabis dispensary is navigating all of the legislation. Each state has unique limitations on how much cannabis can be purchased at any given time, where these transactions can take place, I know the restrictions placed upon individual buyers. For some potential customers, this means that sticking with their old grey market retailer is just a matter of convenience. This can be especially true for individuals looking to use the legal cannabis industry as a way to supplement their medical use. Recent statistics from Canada even suggested that upwards of half of the cannabis market still sticks with their old grey market sellers.
This creates a problem for legal cannabis dispensaries. Sticking closely to state legislation means smooth sailing in the long run, but it does mean that opening the dispensary will take a much longer time. Skirting the rules and opting for the grey market means that a dispensary can open quicker, but it runs the massive risk of being shut down by state and federal law enforcement. As legal cannabis becomes more common and regulation becomes more relaxed the tension between legal and illicit cannabis sales will lessen over time.
What’s Next for Legal Dispensaries?
We live in the most exciting time to be starting a legal cannabis dispensary. As more and more states move to legalize cannabis, it will likely become easier for dispensaries to open. The conflict between cannabis becoming increasingly legal at the state level and but still illegal at the federal level has an uncertain future, but as more states legalize cannabis it will be harder for the federal government to ignore the growing trend.
Those of us entering the legal cannabis industry now are paving the way for tomorrow’s cannabis industry leaders. Here’s to hoping they look back on this moment with the same awe we have when we look back at the end of prohibition.