Why Small Businesses Are Struggling in the Cannabis Industry
Cannabis culture in the United States emerged as a result of cannabis crops clandestinely cultivated and sold in small batches by local growers and dealers. Just over a decade ago, the only legal dispensaries one could find were local enthusiasts passionate about pot and eager to share their knowledge of their favorite hobby with those in dire medical need of the good green herb.
Yet, today the cannabis industry is ruled by big business. Despite that only a small handful of states permit legal recreational weed, almost all dispensaries and growers are funded by billion-dollar investments from huge firms. International companies like Molson Coors, CVS, Scotts Miracle-Gro and Constellation Brands are getting into the cannabis space — and it is becoming increasingly impossible for small businesses to thrive.
How did the industry pivot to big business so quickly, and is there anything small businesses can do to find success in this space?
The Regulatory Labyrinth
Whether a business wants to cultivate cannabis, manufacture cannabis products or sell cannabis in a retail environment, the first thing the organization needs to do is apply for licensing with their state cannabis board. Unfortunately, this is much easier said than done.
States vary in their regulations — which is another concern for successful small businesses looking to expand — but for the most part, states impose hoop after hoop for entrepreneurs to jump through. First, business licenses are often limited, meaning only those who are familiar with the process of building a business and can mobilize their plan quickly are likely to qualify. It can take tens of thousands of dollars to develop the business structure necessary to appease regulators. Worse, some required business structures hamper a business’s ability to develop product or reach customers. For example, weed growers in California are required to work with distribution companies, which largely prevents small breeders and cultivators from capitalizing on unique strains or particularly potent bud. Regulators, generally in attempts to ensure the cannabis market is safe and fair, have made it virtually impossible for inexperienced entrepreneurs to excel.
It is possible that a nationwide legalization of marijuana would ease regulations and make it easier for small businesses to flourish. For example, in Canada where cannabis was legalized in 2018, there exist regulations at the federal, province and local levels, but licensing is hardly more difficult than it would be for a non-marijuana business. Yet, with every year that the U.S. continues to control cannabis as a scheduled substance, small businesses continue to be excluded from marijuana markets.
An Underbanked Nightmare
Another significant concern for small businesses operating in the cannabis industry is the utter lack of banking support. Again because the U.S. Federal Government criminalizes marijuana sale, possession and use, the Feds are capable of penalizing financial institutions that provide services to cannabis businesses — even in states where recreational sales and use has been legalized. Because most banks do not want to risk their FDIC insurance or incur fines, most will not consider providing loans, payment processing, business accounts and other services to cannabis growers, manufacturers, packagers or distributors.
As a result, entrepreneurs who might otherwise rely on a small business loan cannot afford to launch a business, leaving space only for those with enough size or wealth to dominate the space. What’s more, it is remarkably difficult for businesses to operate without the support of a financial institution, whereas larger and more established corporations can absorb the risk without much concern.
Already, some banking mavericks are striving to fill this hole in the banking industry, but using non-insured financial services comes with additional risk to business owners. Fortunately, a number of legislators at the federal level have identified this flaw and are striving to pass a bill that would ease restrictions on banks serving cannabis businesses. Yet, given the Trump administration’s antagonistic attitude and President-elect Biden’s history with drug law, it is uncertain when or if this legislation will pass.
A cannabis industry run solely by big business is not what most envisioned with the legalization of marijuana — and it isn’t particularly conducive to an affordable, healthy, community-driven market, either. However, the United States needs to make serious changes to its regulations at essentially every level to ensure that small entrepreneurs have a fair opportunity to grow.