The marijuana business is raking in record profits, and once you have decided to tackle the high fees and complex regulations to start your own shop, you may think your way is clear. Unfortunately, your next difficulty will be finding financing. Sale and distribution of marijuana is still a felony at the federal level, and states have complex and shifting regulations; this makes marijuana a high risk business, and creditors shy away from risk. Before you make any big plans to start your business, be sure you fully understand the financing problem you will face.
The Traditional Bank Problem
Traditional banks are very unlikely to provide you with financing, largely because of the Federal Deposit Insurance Corporation (FDIC), which will not insure businesses that violate federal law. Without such insurance, the lender has no backing for the loan and risks total loss. In addition to that, the bank would be exposed to “aiding and abetting” the commission of a felony, which carries legal ramifications and potential penalties. While obtaining funding for a medical marijuana business is hard, getting a loan for recreational marijuana sales is even harder. The costs to startup and operate a recreational shop are higher, as the application and permit fees are larger. Just allowing the deposit of funds from a marijuana business can result in charges of money laundering for a bank, and even credit card companies are loath to touch pot money. As a result, many legitimate businesses are forced to involve themselves in what amounts to money laundering, by using a cover business as a means of operating a bank account. In the states that now allow the sale of marijuana, the majority of business owners have resorted to friends and family to raise startup cash.
The Dangers of a Cash Business
If you can score cash to start your business, you will still have problems storing and protecting the cash you acquire from sales, keeping your customers happy, and not raising the suspicions of regulators. The bizarre, cash-only culture of the pot business in Colorado has been created by the inability of business owners to hold bank accounts; it is estimated that up to 40 percent of Colorado’s pot-affiliated businesses do not have them. Customers pay cash, which limits the number of customers that businesses can serve and how much those customers can buy. Tax collectors are paid in mounds of cash, which makes accounting more difficult and fraud more likely, and business owners are probably stashing millions of dollars in their bed mattresses. Of course, this just makes pot business owners a huge target for crime, which increases the risk of running the business even more.
Private Financing to the Rescue
Fortunately, private lenders are filling in the gap on this much-needed source of funding. Venture capital is where most marijuana businesses are finding their financing, with private equity funds and consulting firms as other sources. Some high-interest private lending companies that target high risk markets will provide loans if you have a high credit score and have been in business at least six months. Other private companies will provide financing in return for a percentage of equity in your company. As of early 2016, Washington and Oregon lawmakers are allowing out-of-state investors to become pot financers. The residency requirements are being lifted, and Colorado is expected to pass similar legislation this year. Although many fear this will create a domination of the industry by a few large companies, it certainly will allow for easier financing.If you have a high tolerance for risk, this could be a good business for you. Regardless of less than ideal lending conditions and high regulatory fees, growing and selling pot is undeniably a huge money maker, and the market is only just in its infancy.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.