6 Things You Need to Know Before Starting a Marijuana Business

Georgia McIntyre

Georgia McIntyre

Manager, Content Marketing at Fundera
Georgia McIntyre is the manager of content marketing at Fundera. She has written extensively about small business finance, specializing in business lending, credit cards, and accounting solutions. Georgia has a B.A. in Economics from Colgate University.
Georgia McIntyre

California, Massachusetts, Maine, and Nevada all recently legalized the recreational use of marijuana—making it 33 states, including the District of Columbia, that allow some sort of legal use of the drug.

What does this mean for the entrepreneurial minded? Is the cannabis industry the next industry to enter?

With its age and regulatory environment, the cannabis industry is unlike any other.

Entrepreneurs need to put some thought into entering the market with a marijuana business. Here’s what you need to know before starting a marijuana business.

What Does the Marijuana Industry Look Like?

Before you start any business, you should have some idea of what the industry landscape is.

What are the earning potentials? What are the risks? Who is your competition? These are all unknowns that you’ll want to get a handle on before you’re too far in.

Marijuana has only been legalized or allowed for medical use in 33 states in a relatively recent time period.

Given the industry’s short history, no one can be fully confident in how the cannabis industry will unravel—and how marijuana businesses will fare.

But based on early trends in legalized states, here’s what we do know of the marijuana industry.

1. The Profit Potential for Marijuana Businesses is There

As more and more states legalize the drug, marijuana businesses are presented with more profit-earning potential.

Since legalization in 2014, Colorado’s production and sale of the drug has grown to a $1 billion industry.

In 2016, national marijuana sales hit $6.7 billion and sales are projected to reach $50 billion by 2026—further proving the potential of a lucrative industry.

2. There’s Room for Small Businesses

Another important fact for wannabe marijuana entrepreneurs?

The current state of national prohibitions makes it such that big business will likely stay away for the time being.

Marijuana isn’t legalized on the federal level, and national prohibitions prevent the interstate sale of cannabis—making it a prime industry for local businesses to enter.

This doesn’t mean that the state of the marijuana industry won’t change as more and more investors funnel money into successful cannabis businesses in states where the drug’s legalized. However, local and state entrepreneurs can get ahead while big businesses are held at bay—for now.

3. It’s Federal Future is Up to the Current Administration

Yes, there’s lots of profit-earning potential if the marijuana industry keeps moving in the direction it’s going.

But before you start up your own marijuana business, think about its federal future.

Federally, marijuana use and sale remains illegal, and enforcement practices are up to the whims of the current administration.

Attorney Jeff Sessions is outwardly against the legalization of marijuana, considering it a gateway drug that ignites social issues—like the rise in opioid addiction.

Currently, the Department of Justice’s Cole Memorandum is the guiding document regarding federal regulation, stating that the federal government must defer to state legislation (except in specific instances, like the case of selling to minors or dealing with organized crime).

And while marijuana businesses operating in legalized states are protected from a provision in the federal budget that prevents the Department of Justice from spending money to block state laws allowing the sale of medical marijuana, there is still some question of the future of federal regulation.   

Marijuana businesses entering the market do have potential to get into a budding industry early, but need to be wary of it industry’s regulatory future.

4. Entry and Operation Can Be Expensive

Startup costs are a reality for every new entrepreneur.

Those starting a marijuana business, though, might have to front a lot more costs that normal.

As a dispensary, you’ll need to have licenses to sell medical marijuana. In states where medical marijuana is legal, marijuana businesses typically need to pay around a $5,000 non-refundable application fee for starting the business. (In Louisiana it’s only $150 to apply, but in New Jersey it’s $20,000.) Most applicants for certificates fail to meet the startup capital requirements needed to ensure smooth operations from the get-go. In fact, passing this first application step is hard for most aspiring marijuana business owners.

The applications and licensing fees, paired with any regular equipment, marketing, and startup costs you might face, make starting a marijuana business an expensive endeavor.

And once you’re in business, taxes are steep.

Due to the 280E clause (applying to law-abiding illegal drug traffickers paying taxes) marijuana businesses fork over a lot in federal taxes—more than the average small business.

Whereas federally legal businesses can deduct a variety of different businesses expenses, helping those businesses stay afloat, marijuana businesses are federally illegal drug traffickers under 280E.

This means that marijuana businesses can’t qualify for the many different tax credits and deductions for operational expenses.

One marijuana business in Washington, Cannabis City, breaks down how taxes and costs add up:

There’s a 25% tax on what the grower ships to the processor, and another 25% tax on the processor to the retailer. After that, the retailer faces another 25% tax when the product goes into the consumer’s hands. For Washington, there’s a regular 10% sales taxes, city tax, and another 25% federal tax. According to the owners of Cannabis City, about 60% of the value of the product goes to taxes, 30% to the costs of goods sold, and about 1 to 5% left for actually running the business.

5. Financing Options are Limited

The costs of running a marijuana business are extremely steep. And to make those costs harder to bear, marijuana businesses might have a harder time finding small business loans to keep their businesses operating smoothly.

The lack of small business financing for marijuana businesses stems first from the fact that they’re federally illegal businesses.

Many of the best banks for small business loans operate on the federal scale and are subject to federal banking laws that make lending to a marijuana business nearly impossible. Big, federal banks aren’t willing to take the risk of being seen as aiding activities that are considered illegal under federal law.

So for the most part, big banks won’t lend money to a marijuana business.

Some smaller banks and credit unions have started providing smaller loans and cash advances to marijuana businesses.

Alternative lenders have also filled in some of the gaps in lending to owners of marijuana businesses.

However, before you dive deep into starting a cannabis business, be aware that your financing and funding options will be limited compared to what a more traditional small business could secure.

6. Regulation Compliance Can Be Time-Consuming

All small businesses have to keep up with regulations.

Marijuana businesses are no exception—and their regulatory burden is harsher than most.

Remember, a marijuana business that’s legal under local and state laws still isn’t legal under federal law.

But because federal jurisdiction defers to state jurisdiction as it pertains to the cultivation and sale of marijuana, cannabis businesses can get by without serious federal prosecution by following local and state regulations carefully.

Because marijuana businesses are legal on a state-by-state basis, the licensing and documentation required will vary in each state.

Before starting a marijuana business, know exactly what documentation, licensing, and regulatory bodies you need to comply with to start and operate your business. FindLaw has a good resource on what marijuana businesses need in each state.

In general, marijuana entrepreneurs have a lack of understanding of what local and state federal rules and regulations they need to comply with.

The current trend is towards legalization of medical marijuana or recreational use with robust regulations put in place. While more and more states are considering legalizing at least some use of the drug, there’s no indication that regulatory compliance will become any easier for these businesses.

If you’re interested in starting a marijuana business in your state, best practice is to consult a lawyer who is experienced in this relatively new field.

Taking time to sit down with a lawyer and fully understand your obligations as a owner of a marijuana business will save you trouble (with potentially serious ramifications) in the long run.

Ready to Start Your Own Marijuana Business?

Taking a step back and weighing the pros and cons of starting a business is an important step for any soon-to-be entrepreneur.

But considering the many complications and intricacies of the marijuana industry, wannabe cannabis entrepreneurs might to think a little bit longer and harder about whether this the right move for them.

The excitement of the profit-earning potential in a relatively new and rapidly growing industry needs to be weighed against the downsides—namely the costs, financing struggles, and regulatory burden.

Think about these 6 things carefully, and if you choose to start a marijuana business of your own, good luck!

Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone. They haven’t been reviewed, approved, or otherwise endorsed by any of the companies mentioned above. Learn more about our editorial process and how we make money here.
Georgia McIntyre

Georgia McIntyre

Manager, Content Marketing at Fundera
Georgia McIntyre is the manager of content marketing at Fundera. She has written extensively about small business finance, specializing in business lending, credit cards, and accounting solutions. Georgia has a B.A. in Economics from Colgate University.
Georgia McIntyre

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