80% of startups fail within 18 months. This percentage is even higher for cannabis, especially when considering how cannabis business problems spark failure.
Legalization is still maturing. This, in addition to the disparities from state to state and federal prohibition of cannabis, makes it increasingly challenging to maintain compliance with regulating forces.
As with all highly regulated industries, dreams of success in this ‘budding’ industry can go up in smoke with one wrong move. With reputations, licenses to operate, and livelihoods at risk, we know the most common cannabis business problems and how to solve them.
This is precisely what we aim to cover in this article.
Limited Cannabis Banking Opportunities
Even with the sale of cannabis-infused products expected to hit $3 billion in sales this year, providing banking services to cannabusiness operators can be risky. This is one of the most common cannabis business problems, causing businesses to operate on a cash-basis.
Despite more banks offering financial services to cannabis businesses than ever before, many canna-companies still have trouble securing assistance from financial institutions. Federal cannabis prohibition makes working with cannabis-related businesses a liability, and even with the industry progressing, some banks are hesitant to work with these businesses.
Contrary to myths regarding banking for the cannabis industry, bank and credit unions are allowed to bank cannabis. According to FinCEN’s BSA Expectations Regarding Marijuana-Related Businesses, institutions must conduct some customer due diligence that usually includes the following:
- Contact the right state authorities to determine whether the cannabusiness is appropriately licensed and registered.
- Analyze the license application and all related documentation from the business to obtain a state license to operate in its cannabis niche.
- Ask state licensing and enforcement authorities for information regarding the business and all related parties.
- Learn about the normal and expected activities for the business, such as the kinds of products it will sell and the customers it will serve.
- Continue monitoring publicly available sources for adverse information relating to the business and all related parties.
- Continue monitoring for suspicious activities.
- Refresh information for periodically continuous due diligence.
Bypassing Limited Banking Opportunities
As a business owner, you already have a lengthy list of responsibilities. But it’s crucial to forge solid relationships with financial institutions and investors after producing your financial strategy, business reporting, and other essential documentation.
First, you’ll need the documentation to show your business is legitimate. Once you have your documentation in order, it’s time to find the right financial institution. Many cannabis business owners lose banking access at one point or another. However, plenty of banking solutions exist.
All of our clients have banking, but a lot of them are through credit unions. The credit unions typically charge around 2%. However, some other fee structures exist.
Traditional banking at a big bank means you’re making sure you don’t have “420” or “cannabis” in your company name. This is a big red flag, and while these institutions are not looking to call you out, they’ll likely shut you down if they find out you’re in cannabis.
Many of our clients have a separate, non-cannabis entity, and that entity gets banking. In this case, the non-cannabis entity pays many of the expenses on behalf of the cannabis one. In essence, this comes down to the accounting to ensure that everything is being accounted for properly. Hence, solutions exist to these common cannabis business problems.
Expired or Irrelevant Licenses
Each state has its own set of regulations for licensing. These rules vary among medical and recreational cannabis businesses.
On municipal and state levels, cannabusiness operators must have all of their documentation in order. Some states require business licenses AND retail licenses. You might also need dispensary or cultivation licenses. Regardless of which licensing applies to your business, the regulating forces of the cannabis industry demand specific documents in conjunction with your operations.
Unfortunately, it’s all too common for business owners to make cannabis compliance mistakes. Here’s what many fail to do:
- Learn which licenses they need
- Have all application and association fees paid
- Maintain the right licenses
Without the right documentation, compliance is impossible. This in mind, if your business operates without adhering to the compliance standards in place, any success you’ve made in this industry is at risk.
Avoiding Expired or Irrelevant Licenses
To ensure complete county, state, and federal tax compliance, you – or someone you work with – will need to stay informed on all current regulations and documentation. This means checking and monitoring your licensing needs, keeping all documentation up to date, and make sure all application and associate fees are paid.
If you have someone handling this aspect of your business, you’ll keep your business audit-ready in case regulatory forces decide it’s time for an inspection. In turn, you’re always prepared for a worst-case-scenario situation before it happens.
Failing to Report Inventory
In 2019, Denver’s Department of Public Health & Environment conducted 25 dispensary inspection reports. According to some preliminary documents filed on the department’s website, 20 dispensaries included a minimum of one “hold and quarantine flag.” This is a failure rate of 80%, and it was the result of industry professionals neglecting their inventory management duties.
Inventory management, especially seed-to-sale tracking, is crucial for cannabis compliance. In the State of California, failing to report cannabis inventory can result in a compliance infraction. This is the same regulatory practice found in other states, as well.
The Bureau of Cannabis Control demands notification of any inventory discrepancies. However, without the proper inventory monitoring processes in place, it’s easy to violate compliance.
Effectively Monitoring Your Cannabis Inventory
Cannabusiness operators must regularly submit compliance inventory reports. This documentation needs to be free of inaccuracies to avoid costly infractions.
To steer clear of these violations, you should first incorporate these cannabis inventory management tips to create a set of inventory management SOPs. If you’re still not satisfied with your business’s effectiveness at handling inventory management, analyze your SOP’s and determine any essential amendments to improve them.
Operating Plan Violations
Many state regulations – and even some local regulations – demand cannabis business operators submit operating plans. Typically, these documents are rather in-depth, encompassing all aspects of your plan to conduct business.
From the start of your endeavor, you’re expected to have a plan in place to keep your business aligned with its goals and compliance demands. However, ambitious entrepreneurs looking to break out into the cannabis industry don’t always know they need an operating plan in place.
Other times, a cannabusiness operator has an approved operating plan in place but decides to make amendments after approval without informing the right regulating entities. The problem here is that even if your changes are to improve regulatory compliance, you’ll need to seek permission.
Avoiding Operating Plan Violations
Depending on your business’s needs, you’ll either need to create or alter your operating plan. Then, if your operating plan needs amending, you can eventually make the changes once you seek approval from regulating forces.
Rather than making changes on a whim, plan them. Determine what you need to do before altering your operating plan, and make these changes only after you get permission.
SOLVE YOUR CANNABIS BUSINESS PROBLEMS WITH NORTHSTAR
Are you looking for solutions to problems unique to the cannabis industry? For recommendations regarding financial services, licensing, inventory management, operating plans, and more, contact us today!