The Basics of Starting a Cannabis Business: Funding & Financials

Those interested in starting their own cannabis business are likely aware of how difficult the industry can be to navigate. It’s hard to know where you should even start between adhering to strict federal regulations and making sense of the application process. Before jumping in head first, keep reading to learn some basic fundamentals about how it all works!

Determining Total Costs for your Cannabis Business

Many factors go into determining the cost, but in general, there are three categories: startup costs, operational expenses, and overhead. Startup costs include things like licensing fees, lab testing fees, and other administrative items. Operational expenses can vary greatly depending on what your business does – for example, cultivation businesses have higher utility bills than dispensaries or extraction companies. Overhead includes rent, insurance premiums, and staff salaries – these costs will be largely based on your location as well as the size of your operation. The good news is that with all the new legislation being passed across states legalizing cannabis use for medical purposes, more opportunities exist now than ever.

The first question you might ask yourself is how much capital do I need? The truth is, there’s no one size fits all answer. You’ll have to research the market in the area you’re looking to operate in to see the exact costs. The yearly license fee can be anywhere from $1,000 in states like California to $60,000 in newer markets like Virginia. Depending on the state, the initial startup fees can also vary depending on the size of your operation or the type of license you want to obtain. 

How to start a cannabis business

Green Space Accounting has experience helping entrepreneurs start businesses in all sectors of the cannabis space. If you’d like more information on our services, please contact us today — we’ll explain how Green Space Accounting can help.

Raising Capital

The second question you might ask yourself is how do I secure this funding? All startups need adequate funding in order to succeed in their market. While startups in other industries may apply for a business loan from a credit union or traditional bank, it’s not so easy when it comes to the cannabis space. This is due to marijuana being classified as a Schedule I controlled substance on a federal level, causing banks to be hesitant to take on the risk of working with these types of clients. 

Nonetheless, obtaining a loan is not impossible. Your best bet is to look for state-run credit unions rather than larger national banks. These banks have fewer federal regulations and have even been given guidance from the government on how to service legal cannabis clients. It’s important to note, however, that all banks are still subject to the Bank Secrecy Act. This requires banks to flag transactions of $5,000 or more that may be associated with illegal activity, including cannabis sales. We recommend you have all your financial and legal documentation in order before seeking out a bank, as this will increase your chances of being taken on as a client.

Another option for raising capital comes from cannabis-specific investment groups. Because cannabis is a rapidly growing industry with high investment potential, many are eagerly seeking to support up-and-coming businesses. While some cater strictly to plant-touching businesses, others support ancillary businesses from software & tech companies to packaging manufacturers. Some of the leading venture capital firms include Casa Verde, Privateer, & Tuatara Capital to name a few.

Compliant Cash Flow Management 

Once you’re up and running, you must understand how to properly manage your business’s financial side. Because of the state and federal regulations mentioned above, there’s more of a need to manage your revenue not only effectively but securely. Poor cash management can, and will, lead to negative consequences like tax troubles or bankruptcy.

One reason why cash flow issues can arise in a cannabis business is due to poor bookkeeping. With all the day-to-day tasks that business owners juggle, it’s easy to fall behind on keeping track of different accounts, transactions, and reports. This can affect not only you and your business, but also your employees, vendors, or anyone else involved in your operations.

A common misconception about entrepreneurs who run their companies from home is that they don’t need an accountant because everything will be done via a computer spreadsheet program like Excel; however, this is a dangerous precedent. If you don’t know what you’re doing, you could be making costly mistakes without even realizing it. This is due solely to a lack of experience and working without any team members around for help solving problems if needed. 

Conclusion 

Although time-consuming, staying on top of your accounting & cash flow will aid in your company’s financial success. If these tasks seem too complicated for you to handle on your own, click below to schedule a free 30-minute consultation with Green Space Accounting. We will work with your team to identify and implement solutions to improve performance and put effective financial systems in place.