The Hidden Costs Of The Cannabis Business

A pedestrian walks past Curaleaf Inc. store in the Queens borough of New York, U.S., on Thursday, Oct. 18, 2018. Curaleaf, a Massachusetts-based company backed by Moscow banking veteran Boris Jordan with roughly 30 pot stores open in 12 states, is raising $350 million through a private placement that values the company at about $4 billion. Photographer: Jeenah Moon/Bloomberg© 2018 BLOOMBERG FINANCE LP

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There’s a common perception that the cannabis business is the modern-day gold rush — that there’s plenty of money to be made by anyone willing to work hard enough.

But in this case, the prospectors had better come equipped with deep-pocketed investors or plenty of cash. Because of cannabis’ mixed legal status (legal in some form in two-thirds of the states but illegal at the federal level) the cannabis business comes with lots of built-in costs that other startups don’t have to grapple with.

First are the capital requirements imposed on dispensaries, which can run from $150,000 to $250,000, depending on the state. Application fees for obtaining a license to sell cannabis can be as high as $200,000, which may or may not be refundable if the application is denied. In Pennsylvania, there’s an application fee of $200,000, and potential licensees must provide proof of assets of $2 million, $500,000 of which must be cash in the applicant’s bank account. That doesn’t even include the cost of the various required state and local permits.

Then there’s the specialized legal work required when dealing with a commodity as highly regulated as cannabis, which can run upwards of $50,000 annually. And you have to find a lawyer first – some won’t take on cannabis customers.

Setting up the actual retail space isn’t cheap either. Opening a clothing boutique costs between $50,000 and $150,000, for example. But one industry estimate puts opening a cannabis outlet  at a minimum of $250,000, with an additional $65,000-plus for security, including multiple camera feeds, weapon detectors, roll-down steel doors and motion-triggered warning systems inside and out since cannabis is still a mostly cash business.

Because cannabis is still federally illegal, banking laws restrict access to banks and credit cards. The major credit card companies themselves also prohibit using their cards for cannabis purchases. That’s led to an estimated 70% of cannabusinesses being unbanked, which means not only are most of their transactions in cash but they also have to pay bills, salaries and even income taxes in cash. That means owners must do everything in person. So paying the electric bill, for example,  requires a trip to the actual location where payments are taken, during the hours when it is open and waiting in line to make a payment and receive a receipt.

In some states, cannabusinesses can use credit unions or special cannabis banks that are cropping up specifically to meet their financial needs. But those often charge fees of as much as $2,000 a month because there is little competition but also because of the overly burdensome paperwork requirements. One Colorado credit union was required to file 7,000 reports for 220 cannabusinesses, as opposed to 226 reports for its other 33,000 customers combined.

Some states — and even a handful of senators — are considering laws to allow state-charted banks to work with the cannabis industry. But as long as cannabis is a Schedule 1 drug (at the same level as heroin and methamphetamines) access to banking will be limited.

Once a shop is up and running, an owner still has to stock the shelves. That can be costly if the shop happens to be in a state that doesn’t allow retailers to produce their own products. Labeling guidelines differ from state to state but generally are fairly onerous and expensive. In Massachusetts, for example, edibles labels must contain 20 separate data points, including a list of ingredients and the cannabinoid profile, plus a 49-word warning statement, some of it in all caps, which leaves precious little room for brand building.

Then there’s the day-to-day operating costs. A generic retail point-of-sale system won’t work for most cannabusinesses. They need custom POS systems that integrate with mandated governmental systems and specialized software that tracks the details of every sale to comply with state laws. These can cost thousands of dollars every month.

As the cannabis industry expands, the amount of money expended on these extras will grow proportionally. While some expenses, such as licensing fees, are never going to go away, eventually cannabusinesses will be able to access the banking industry and that, at least, should cut down on some of the costs of doing business.

Read more from the source: Forbes.com

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