Why Good Weed is Not Enough
If we take an honest look at the cannabis industry, it has been operating for decades. The only difference? It was operated by criminal organizations that exploited the opportunity that criminalizing marijuana brings. In states where cannabis is now legal, there has been many debates and efforts to right the wrongs of lower income neighborhoods that were targeted for prosecution and imprisonment during the infamous war on drugs.
Although laws and bills have been passed to offer opportunities for poorer income communities to capitalize on the green rush, wealthy business owners are the ones who are reaping the financial rewards of legalized marijuana.
One may ask, why have lower income communities been able to make money off illegal cannabis yet now that it is legal, they’re missing out on their piece of the pie?
Lack of access to capital is a major factor preventing lower income individuals from successfully entering the cannabis industry. Insufficient funds in the cannabis industry can result in license delays and the government closing the doors on your business. It’s not a hit on poor people directly, it’s more of an indirect hit as the regulations, fees and taxes the states imposes bombards the cannabis industry’s lowest income earners.
The high start-up cost has made it very difficult for low income entrepreneurs to start from the ground up. It’s a classic case, where it takes money to make money, and when it comes to the marijuana business, that price tag is anything but cheap.
Before states started to legalize cannabis, selling weed had a lower barrier of entry. To sell marijuana, you needed the following traits and resources. A good connect who had the type of marijuana that customers wanted to buy, a willingness to get involved in crime and suffer the legal consequences, a willingness to risk losing your life if you ended up in a turf war or all the other violence that the drug trade brings. In addition, you’ll also need your steady supply of customers who are willing to buy marijuana from you.
For drug dealers, most of the math involved was making sure they weren’t short when giving the superiors of their organization the proceeds. They also made sure the weight of product was measured accurately to ensure they were charging the correct price. Aside from staying alive.
What wasn’t needed for street dealers was a CPA, attorney, business consultant, compliance with zoning regulations, licensing fees and lab testing of their products. The legalization of marijuana has turned the business into one where you needed guts and street smarts, to one where you need large amounts of money and access to a knowledgeable network of professionals to provide financial, business, tax and legal expertise.
What made the illegal drug trade so profitable?
Not everyone was willing to risk suffering the consequences of what participating in the illegal drug trade brings. When something is illegal, not many people are willing to partake on the distribution side which limits supply, just like the days of prohibition. When combined with a product that is addictive, you end up with a cash cow.
The days where having quality weed was all a seller needed are long gone. Particularly in states that have legalized recreational marijuana. In the legalized industry you can have the best cannabis in the world but if you’re not under compliance with local and state laws and regulations, your business will not succeed. Adhering to the laws are costly for a new business. The total cost of opening a dispensary differs according to the state. For example, in some states you need an estimated $150,000 to start a dispensary where in Nevada you would need $250,000. Here is a list of all the estimated costs accumulated before a dispensary is allowed to put the open for business sign on their door.
- Application Fees ($30,000)
- State Application /Annual Revenue Based Fees ($1,000-$96,000)
- Securing Rights to a Building, buying or renting ($0-$120,000)
- Professional Fees ($0-$55,000)
- Staffing ($1,000 to $2,000)
- Marketing ($15,000 - $75,000)
- Facility Build Out ($50,000-$100,000)
When calculating the total costs of opening a dispensary, there is a whole set of hurdles that are blocking people without enough capital. If these costs are dodged, the government can take away your license, prohibiting you from participating in the legal market. One should also take note that the expenses discussed are to open the dispensary, this doesn’t include the ongoing costs that businesses incur. You still have utilities bills, payroll, inventory, security and accounting expenses.
The Cannabis Industry differs to other businesses because not only is it expensive, but you need a network of wealthy investors to get started, if you don’t have the money yourself. This creates another division as rich people usually have a network of other rich people, who will either go into business ventures with them or have the right influence to get the business past the government red tape.
Most lower income small business owners seek loans via banks or credit unions. Unfortunately, this is not currently available since these institutions are backed by the federal government. As of now, the government has marijuana classified as a Schedule 1 narcotic. This creates restrictions that block any involvement of banks with the cannabis industry. This perpetuates an additional barrier to those who could afford to sell under the illegal market but cannot afford to sell under the legal market. This dilemma continues to persist as many small business dispensary owners lack adequate business funds of their own. Couple that with lack of access to institutional business loans, where even if they prove to have a solid business plan with foreseeable profits, the funding continues to be denied.
If the state governments really want to provide lower income business owners with the opportunity to succeed in the cannabis industry, they need to create laws that apply to low income small business owners only. One step would be to provide small business loans to businesses, enabling them to pay the loan back out of their monthly profits. This would have to be a nationwide push as the loans would come from a federal level via banks and credit unions.
The other alternative would be to lower the cost of fees and regulations that prevent business owners from opening their doors in the first place. Either way, the states lose nothing as taxes and job creation would more than make up for the reduced fees and license costs that the local and state governments impose.