All across America, legislatures are taking a new look at marijuana. So far, their conclusions differ: an ease on medical marijuana restrictions in one state; legalization of recreational usage in another; little to no change in a third; etc. But one thing is certain: What was once considered the exclusive province of cops, stoners and outlaws is becoming more mainstream.
Perhaps the greatest sign of marijuana’s improving reputation occurred last week, when Microsoft became the first major corporation to invest in its growing economic clout. Till now, most investors have kept a safe distance, recognizing that marijuana is still classified as illegal by the federal government, and viewed suspiciously by vast swaths of investors and consumers. Microsoft’s move is a sign to many that the industry’s in for a major change—and it’s something small business owners should pay attention to.
What This Means for Marijuana Businesses
In the immediate future, not much. Most banks still refuse to finance or even open accounts with marijuana shops, and Microsoft is investing in software, not growers and sellers themselves. But Microsoft’s long reach and deep pockets may signal a turning of the tide for small business owners who hope to get in on this lucrative and fast-spreading trade.
One former California-based grower I spoke to, who chose to remain anonymous, acknowledged the distance the industry has yet to go while keeping an optimistic outlook: “[Microsoft’s] investment demonstrates an incredible amount of trust in a market that’s not only proved itself as viable, but exciting and primed for expansion. The fact that the deal centers in tech is awesome, because tech grows exponentially every market it touches.”
What Marijuana Businesses Can Do in the Meantime
One reason that banks refuse to grant loans to marijuana businesses is that it would threaten their insurance. The FDIC (Federal Deposit Insurance Corporation) usually won’t insure banks that provide loans to merchants still viewed as felons by the U.S. Government. In fact, a bank that knowingly accepts cash from a marijuana grower or distributor—whether legal at the state level or not—is technically guilty of laundering.
Pot-related businesses that don’t actually tangle with the plant itself—such as manufacturers of pot-growing equipment—are sometimes viewed as a safer risk. These businesses may be extended merchant services like credit card processing, deposits, and lines of credit, while growers and distributors are forced to use other means, including third-party suppliers of debit card sales and even private houses where cash is stored and protected by hired security.
Davide Reid, a former employee of a state-of-the-art grow facility based in Denver, relates that whenever he visited his personal bank he “always had to take my weed badge off. If they saw it, and knew that I was an employee of Sundance Gardens, it was almost guaranteed that they’d close my account. They had no way to verify the money wasn’t from weed.”
But you don’t have to grow or distribute the plant itself to take advantage of the business in general; there are plenty of ways to participate in this burgeoning enterprise without directly touching the merchandise, including selling vaporizers and pipes, software development, consulting, and security.
While traditional business financing is hedging its bets and waiting to see whether pot will be legalized federally, the ongoing expansion of alternative financing means that you aren’t left completely without options. These options include:
• Private short-term lenders. A person or organization that gives loans to higher-risk applicants, but charges higher interest rates in return.
• Venture capital and private equity funds. Funds that manage the money of private investors who want a piece of a small- to medium-sized business with great potential. Some venture capitalists offer merchant services as well.
• Angel investors. Wealthy individuals that invest in small startups. Do you have any rich stoner uncles?
• Marijuana business consulting firms that manage private funds. Firms that manage private funds willing to invest in high-risk businesses.
California-based Mentor Capital, Inc. is a good example of the latter. Mentor Capital is a publicly traded company that invests mainly in medical marijuana startups. The cost of working with them can be quite high: an appreciable amount of ownership stake in your business in exchange for a loan, while allowing you full operational control. But many in the industry are happy to make such a bargain, as it ensures steady funding when they need it most from a reputable, established company.
“It’s not so much that it’s hard to get financing; it’s that you get it from different channels,” Reid says. “It’s more a matter of private individuals coming forward because they see the profits are going to be huge and they want to get in on the ground level. I knew a guy from Florida who came to Denver to invest $500K of his own money into an edibles license because he knew he’d make it back in sales very quickly once he started producing products.”
Keep in mind that you don’t need $500K to prepare for a future in this billion-dollar business. Establishing and building business credit will provide new opportunities, making it one of the best ways to prepare. Paying your bills on time, maintaining good relationships with suppliers and vendors, and using business credit cards will open financial doors that would remain tightly shut otherwise.
Guidance for Business Owners
Considering the confused state of the laws regarding marijuana, and the relatively short amount of time it’s been considered a viable business, outside advice from experts in the field can be invaluable. Such experts might be attorneys who know the laws in your state backward and forward, or experts on crop cultivation or local market strategies. These consultants aren’t investors, but traditional pay-for-services specialists.
Just make sure you perform your due diligence before choosing a consultant. Talk to current and former clients, research their reputation within the industry, etc. As with any brand-new, highly lucrative trade, there are always people looking to quickly cash in and who wouldn’t hesitate to take advantage of you to do it.
Entrepreneurs in the marijuana trade are still perceived by many to be a little too close to the edge for comfort. They’re not alone: The Small Business Administration has a long list of businesses it deems ineligible for loans, including legal adult entertainment and gambling. But pioneering is never easy, and those who stay the course and use ingenuity and every resource at their disposal to succeed will likely find themselves in an enviable position when society finally catches up.