It's hard not to see the allure of opening a cannabis business! Yet, while there is a good living to be made – cannabis dispensaries average $974 of profit per square foot – breaking into the burgeoning sector seems reserved for those with the means to get started. There's some truth to that.The cannabis industry may be lucrative, but it can require a sizable initial investment. For dispensaries: stock must be purchased, premises rented or bought, staff hired, a shop layout planned, and more. Grow businesses can be even pricier, with everything from grow lamps to CO2 regulators needed to maintain optimum growing conditions.That raises a question: "How to start a cannabis business on a budget."Is it possible? Yes – although you'll always need some money to invest in the business. Below we'll detail what you need to consider and how to navigate the biggest pitfalls and cash sinks that can befall a fledgling cannabis business.
How to start a cannabis business on a budget
How much does it typically cost to get started?
To achieve a business equivalent to a regular dispensary, entrepreneurs need to invest substantial sums before seeing any returns. These figures differ wildly depending on the type and scale of the cannabis business you wish to create.For example, a small dispensary may have an average cost of $50,000 for setting up, while a larger dispensary may exceed $1 million. A big variable in that is the real estate – and the application fee (see more below).Cultivation businesses are also a costly affair. However, where indoor cultivators need to grow lamps and other complex equipment, outdoors growers need only a plot of land and a favorable climate. That can reduce costs dramatically.You'll want to investigate your specific business type and plan to get a more concrete idea of the final cost. Here are some important considerations:
- Licensing fee. You cannot establish a cannabis business without first acquiring a cannabis retail license. Assuming it's legal in your state, the application fees vary considerably – from a few hundred dollars to tens or even hundreds of thousands. Worse, these fees are non-refundable, meaning if you somehow get rejected, it's a lost cost.
- Location. The cost of renting or buying is a major factor – real estate eats up a big chunk of revenue per month. That can be reduced by opting for cheaper or less desirable premises; however, it comes at the expense of footfall and business competitiveness. (You could get around that by relying on deliveries.)
- Taxes. Like the licensing fee, taxes change from state to state (and even by municipalities) – creating another factor you'll want to try and reduce.
- Security. While not a major consideration for most cannabis entrepreneurs, it should be. Because of the scarcity of cannabis banking, some businesses perform much of their operations in cash. That means cannabis businesses have a reputation for being cash-rich – attracting fraud and theft. You need to ensure your business is protected and insured (and you've got proper cannabis banking.)
Where is your funding coming from?
Funding, or capital, is the biggest factor when learning how to start a cannabis business on a budget. Unless you're blessed with bottomless pockets, securing a reliable source of funding is essential. However, for cannabis businesses, the options are much more limited than for regular businesses.Due to federal prohibition, cannabis companies cannot secure loans from major financial institutions. Fortunately, there are other means to generate funding. Here are some of your options:
- Cannabis financial institutions. Certain financial institutions and banks, like Safe Harbor, do provide loans and funding for cannabis businesses. The terms on these loans comply with all financial rules, but major institutions are unwilling to take on the risk.
- Venture capital. Lucrative profits always attract the interest of willing investors. Try finding local and national venture capital firms (and other investors) interested in backing your cannabis business. You'll want an airtight business plan to secure their trust and support.
- Friends and family. Asking friends and family for a loan to support your business is a viable option for many entrepreneurs. It decreases the financial risk to your business and gives you an incentive to earn a profit to repay your backers.
You may be wondering about harnessing your existing assets, e.g., a house or existing business. That's tricky. Yes, these are a good source of money. But unless you're selling assets, using them as collateral for a loan can breach most banks' policies. Some people lie about their intended use of the money or misrepresent their business to the authorities, but this risks your right to earn revenue going forwards (or to secure future funding).
What kind of cannabis business are you opening?
Deciding how and what your cannabis business is will determine many of the expenses you're likely to incur. The two most common types of business are dispensaries and grow operations. These are also some of the most investment-heavy. Even manufacturing plants for extracting CBD or producing THC gummies need machinery, large premises, and licensing fees.There are other types of cannabis businesses, however.From lawyers to banks to accountants, a whole host of ancillary businesses are opening to cater exclusively or predominantly to the cannabis sector. The key benefit is a dramatic reduction in costs. You can work in the industry, helping and supporting other cannabis businesses without the need for a high initial investment. Other low-cost opportunities include a cannabis packaging company or paraphernalia (e.g., pipes or bongs) manufacturer. There is a high demand for these products but a lower initial investment.
Final thoughts
Learning how to start a cannabis business on a budget is all about being practical and reasonable. With fewer funds, certain avenues aren't open to you. You'll want to focus on a smaller setup with a strong emphasis on growth. Meanwhile, you can also consider other aspects of the industry, where the initial costs are not so daunting.