Repair, Restore, Reclaim Series Part 4: Create Equitable Access to Capital
During this four-part series, join Marijuana Matters as we break down the regulatory barriers to social equity in the cannabis industry. This is part 4. You can read part 1 here, part 2 here, and part 3 here.
Starting a cannabis business is an expensive venture. If you want to open a business directly involved in growing, processing, or distributing cannabis, you’ll need to fund the following:
· Licensing. You’ll need to obtain the appropriate cannabis license from the state and municipality your business will operate in. For example, in Colorado a retail marijuana store license costs $7,000. Renewal costs $1,800 annually.
· Capital requirements. Many jurisdictions require license applicants to show proof that they have a certain minimum of liquid and non-liquid assets. In Michigan, cannabis license applicants must show proof that they have between $150,000 and $500,000 in assets, at least 25% of which must be liquid.
· Real estate. Whether it’s for cultivation, processing, or distribution, cannabis operations are housed in a facility you’ll need to rent or purchase. Depending on your state’s real estate market and space needs, you could pay anywhere from $40K-100K in rent a year.
These ordinary businesses expenses don’t cover the cost of federal prohibition. Though cannabis has been legalized for medical or recreational use in most states, the U.S. Federal Government continues to classify cannabis as a Schedule I substance. This has resulted in the following economic barriers:
· Enormous tax payments. Section 280E of the IRS tax code prohibits cannabis businesses from deducting ordinary business expenses from their tax payments. Because of this legislative hurdle, cannabis businesses can pay tax rates as high as 70% of their income.
· Bank fees. Federal prohibition is a major disincentive for banks to work with the cannabis industry. When banks do choose to work with cannabis companies, they tend to charge steep fees to cover the risk of working with a federally illicit trade. In Massachusetts, the only bank that works with cannabis charges medical marijuana businesses $5,000 a month for a checking account.
· Disqualification from SBA loans. Because cannabis is illegal at the federal level, both direct and indirect marijuana businesses are ineligible for SBA financial assistance. Disqualified businesses include cannabis farms, processors, dispensaries, labs, and all businesses that get any of their gross income from sales to a plant-touching cannabis business.
These regulations exclude economically disempowered individuals from the cannabis industry, another collateral consequence of cannabis prohibition. The war on drugs targeted Black communities, creating additional poverty and upheaval in spaces already dealing with the consequences of legal racism including slavery, segregation, and redlining.
Cannabis regulations that ramp up the costs of entering the industry assume that people who don’t have access to lots of capital aren’t interested in or can’t start a cannabis business or will not add value to the cannabis industry. These assumptions are false and make it even more difficult for innovative, hard-working, entrepreneurial individuals to build wealth.
Social Equity Spotlight: Illinois, Massachusetts, and California
Social equity in the cannabis space is reparations. The following jurisdictions have implemented policies that make room for economic racial justice.
Illinois recreational cannabis laws mandated the creation of the Social Equity Cannabis Business Development Fund Loan, a low interest loan program available to social equity applicants. The loan can be used to cover the costs of operating a cannabis business including rent, payroll, equipment, inventory, compliance fees, legal fees, training, utilities, and other ordinary business expenses.
For a minimum of two years, licenses for delivery-only cannabis businesses and certain microbusinesses are exclusively available to Massachusetts’ certified Economic Empowerment Applicants and Social Equity Applicants. Additionally, the state’s social equity program provides financial assistance including waived license application fees, a 50% reduction of the annual license fee, and waived seed-to-sale tracking program fees.
The California legislature passed the Cottage Cannabis Farmers Bill in 2016 to protect micro-farmers from the monopolization of the cannabis industry by “Big Weed.” The bill created separate license tiers available to small cannabis farms and microbusinesses at a more affordable cost than larger licenses. Additionally, the state placed a five-year delay on granting the largest license types to give smaller cannabis businesses time to develop in a market free of the largest competitors.
Focus on Solutions
The most effective way to address the lack of capital in poor Black communities is to address the structural inequality that created that lack. The following policies may form a bridge between justice and poverty in the cannabis space.
Create loans for social equity applicants. Allocate a percentage of cannabis tax revenue to the creation of a low-interest loan program exclusively available to social equity applicants. Provide free technical assistance guiding applicants as they apply for these loans and licenses.
Legalize cannabis at the federal level. As long as cannabis remains illegal, cannabis businesses will be unable to access government assistance be it through loans, programs, or tax deductions. Additionally, federal prohibition creates a legal incentive for banks and insurance companies to avoid cannabis businesses, putting these state-regulated businesses at unnecessary risk.
Make certain licenses exclusively available to social equity applicants. Reserving licenses for those most impacted by the war on drugs is the beginning of fairness. It is unreasonable to expect that Black individuals robbed of the opportunity to build generational wealth because of racist policies will be able to fairly compete with individuals who benefited from those racist policies.
Remove capitalization requirements. It makes sense to demand proof of capital from banks and insurance companies, businesses that are built around their capacity to deliver cash to their customers. It doesn’t make sense to impose these requirements on cannabis businesses that are extremely dissimilar to banks and insurance companies. Capital requirements are a barrier to small cannabis start-ups, particularly those owned and operated by the victims of structural inequality: People of Color, women, and other minorities.
Create laws that protect cannabis micro-businesses. Small cannabis businesses cannot afford to be treated the same way as cannabis corporations. Create legal protections and reduce the cost of licensing for small scale cultivators and retailers.
For entrepreneurs who don’t have the capital: get creative. Entering the cannabis space is expensive, but there are creative approaches to doing it. Consider the following tactics:
· Go ancillary. You don’t have to open a dispensary to benefit from the green rush. Ancillary businesses don’t require cannabis licensing, and many don’t necessarily require a dedicated brick and mortar space to operate either. Start a cannabis photography business, create cannabis positive apparel, design cannabis storage containers, or develop an organic potting soil specifically for growing cannabis. The options are limitless.
· Ask about or for social equity programs in your state. There may be a social equity program in place where you live offering financial assistance to entrepreneurs who have been disproportionately impacted by the war on drugs. If no social equity program exists in your state, join or start a coalition and make your demands. Organizations like Marijuana Matters exist to help you implement effective, social-equity promoting strategies.
Cannabis prohibition created additional poverty for already impoverished communities of color. So far, cannabis legalization has created additional wealth for already wealthy white-owned corporations. The solution to that injustice is simple: equitable access to capital.
Marijuana Matters is a non-profit centering those disadvantaged by the criminalization of marijuana. M2 identifies and eliminates barriers to economic opportunity in the regulated cannabis industry through advocacy, entrepreneurship, and education. Support our work.