Although cannabis is being increasingly legalized among the states, it remains illegal at the federal level in the US. It is still considered a controlled, Schedule I substance. This duality between legal at the state level and illegal nationally makes raising capital for your dispensary tougher than it already is otherwise.
It’s important to know that cannabis business funding will differ from the process for more established industries. To help you navigate the unique challenges of raising capital for dispensaries in the US, we will break down the current state of cannabis finance and regulations, and identify the best strategies to successfully fund your dispensary.
Cannabis and Banking – What’s the Issue?
The lack of federal legalization means that financing opportunities are significantly limited for cannabis companies. Because of the federal illegality and the lack of FDA oversight of the industry, it is difficult or outright impossible to access institutional capital from traditional providers, like banks, and many investment firms are still wary of cannabis.
Because of the industry’s legal gray areas, challenges you can expect to face as a dispensary owner include:
Transaction Limitations: Cannabis businesses are cash-only businesses. Federal prohibition means no credit card company will work with you, and debit cards are only accepted at dispensaries using a cannabis-friendly payment processor like Hypur or CanPay. Be prepared to spend more on cash management, drops, safes, and security.
The banks you’ve heard of won’t work with you: National banks are not playing in this industry (some are starting to work with CBD companies, but not many). Dispensaries need a bank account to pay taxes, operational expenses, rent, and payroll. Regional and local banks or credit unions are sometimes more willing to work with the cannabis industry, and will often be your only option.
Fortunately, change may be on the horizon for cannabis reform at the national level in the US. In May 2021, a key cannabis legalization bill was reintroduced to Congress. The Marijuana Opportunity Reinvestment & Expungement Act (MORE Act) would remove cannabis from the Controlled Substances Act and decriminalize it federally, easing limitations on banking in the industry. Though this particular bill may not pass a Senate vote, momentum for cannabis reform is building at the national level.
How Much Does Opening a Dispensary Cost?
You can expect the cost to open a dispensary to be at least $150,000, and as much as $2 million. How is it possible to raise that kind of cash without the support of banks? It requires more work and creativity, but there are private investors and cannabis-focused investment groups that will invest in promising cannabis businesses. They will still be hesitant to invest in only a business idea, however. You will still have to prove yourself and your dispensary first to get their attention.
To stand out and attract investors, you need to be able to communicate why you’re seeking money and how it will be used. To do that, you need to accurately break down your capital requirements and your operating expenses.
- The funds you will need to launch: your dispensary application must confirm that you have the funds to open the business. This needs to include funds for displays, safes, vaults, construction and renovations, initial product purchasing, and staffing expenses.
- You have enough to survive: budget for licensing delays, rent hikes, and monthly losses. Be prepared to not turn a profit for at least your entire first year, you will need the capital to account for this.
Please note that these operating expenses are based on a national average and may be higher or lower in your area.
- Real Estate: $100,000 annually for rent, and $50,000 on renovations (This is the biggest variable expense for dispensaries. Opening a dispensary in Manhattan or another urban center could cost several times more than this).
- Equipment: $25,000
- Inventory: $1,500/lb
- Application and Compliance: $10,000-$20,000
- Wages & Staffing: $250,000 annually
- Professional Fees: $50,000 annually
- Security and Surveillance: $50,000
- Marketing/Advertising: $25,000 – $120,000 annually
- Licensing Fees and Taxes: $1,000 – 5,000 for renewing annual licensing fees. Tax expenses will be dependent on your revenue and state tax regulations.
Overview of Cannabis Industry Investments
There are several ways that you can get investors and fund your dispensary, each offering different advantages, depending on where you are at with your business plan. They are:
Friends and family: Countless business owners find their start thanks to their personal networks. Your closest friends and family already know and trust you. If you’ve got a solid financial plan and revenue projections to share with them, this is a tried and true way to find seed funding and get your dispensary off the ground. Investments from friends and family could come as a low-interest loan, or as a donation in the form of cash, real estate, or a car. Give them a friendly reminder that donations for cannabis businesses are not tax-deductible!
Investors for real estate: To find early investors, focus on investments in the real estate for your new dispensary. Real estate is not directly tied to the cannabis industry, so it will appeal to more risk-averse investors. It is also one of the biggest expenses you will face opening your dispensary, so acquiring real estate funding is a huge step towards success. It will also help you earn the confidence of other potential investors.
Cannabis business loans: If you’ve received seed money from your network, have your real estate secured, and have submitted a successful application for your dispensary, you are going to have more success attracting further financing for equipment, staffing, product purchasing, and other operational expenses before you begin turning a profit. Once your dispensary plan has some momentum, look for cannabis-specific financing groups. You can expect higher than average interest rates, especially for shorter-term loans. Because of the legal regulations and gray areas of the cannabis industry, be sure to do your research and thoroughly understand what you’re signing up for before working with a financing partner for your dispensary.
Equity investors: These are individuals or firms that seek equity in companies in exchange for an upfront investment. Remember you are essentially giving away a piece of your company, so think about how much of your company you are comfortable not controlling. Additionally, most states require anyone owning more than 5% interest in a company to be listed on the application and will be subject to background checks. This may not appeal to all investors.
Franchise opportunities for existing businesses: The potential for dispensary franchising will continue to grow as more states legalize and the cannabis industry matures. While franchising is not quite the same as starting your own dispensary, it is a great opportunity to run your own store while mitigating many of the challenges that come with opening a dispensary.
Planning is Key
Before asking for money, you need to understand how much you need, and you need to get started on your plan long before applications are due. You can count on it taking at least 3-4 months for a capital raise, with half of that time spent purely on planning and forecasting your capital requirements and operating expenses.
Investors, whether they be close friends or an investment firm, are going to want to see a solid growth plan. You need to explicitly show how their investment will be used, how it will spur growth and profits, your ability to pay back loans, and, for equity investors, what kind of ROI they can expect. Have financial records and plans available for independent audits and calculating financial projections so you can confidently back up your dispensary to investors.
Perfect Your Pitch
The dispensary market is increasingly competitive and saturated in legal states. Investors want to know what sets you apart. They want to know:
Every investor, big or small, needs to be sold on you and your business plan. Spend time dialing in your business pitch to succinctly communicate what is unique and valuable about your business and brand.
You might be tempted to take a shotgun approach, firing off your pitch to hit any and every investor who may be interested. But it is far more effective to take the time, do your research, and target investors who are aligned with your business and your needs. This could be individuals in your network or investors with a portfolio that suggests compatibility with what you are offering. Get to know them, and spend time refining your pitch to get the best results.
Get Expert Advice
Starting a business is tough in any industry. It is even tougher in a new industry like cannabis with so much legal and financial red tape.
Are you looking for expert advice on how to open a dispensary? Mary Jane Marketer is here to help. We offer business consulting, application writing services, and specialized digital marketing solutions to set you up for success. Book a consultation today!