Top Risks for Cannabis Businesses
In 2020, legal cannabis sales generated an estimated $15 billion in the US. Total revenue is expected to double by 2024, as more states legalize recreational marijuana and demand grows.
Connecticut became the 19th state to legalize cannabis in June 2021. People over the age of 21 have been able to legally purchase and carry cannabis-based products for non-medicinal purposes since July.
Yet cannabis businesses face major hurdles that other industries do not experience, in terms of operation and regulation. If you’re thinking about pursuing this business venture, what should you know?
Regulations for legal cannabis use and selling related products vary on a state-by-state basis. Operations for cannabis businesses in all states face one significant disconnect: Recreational marijuana usage remains illegal on a federal level, yet is legal within certain parameters at the state level. So far, this has led to confusion through the supply chain and increases the chance your entity could be served significant fines.
At the state level, regulations have inconsistencies concerning:
- How you grow, test and dispense cannabis products
- How you market and label your products
- Whether or not a health warning must be displayed on products and in ads
- Who tests your products, along with the potency and contamination standards used
Currently, Connecticut only requires self-policed testing. Yet in states where cannabis has been legal for longer, protocols and randomized testing increase risk for a product recall.
If your business or one of your suppliers fails to meet regulatory requirements, you may be faced with high fines, experience reputational damage, see your supply chain cut off or lose your license, ultimately forcing you to shut down.
Although regulations influence quality control, cannabis growers and sellers operate like any other agricultural business. More specifically, your product can become tainted in storage, transport or manufacturing, often from mold, bacteria or the pesticides used for growing.
As a result of fines and product recalls, this incident can damage your reputation, causing you to lose business or have your license revoked.
Where is your product being grown and where is it transported from? In the current regulatory environment, your supply chain is less likely to run into snags – or be completely cut off – if you keep all operations in-state.
As one example of what can go wrong, certain legal cannabis businesses using hemp have found their supplies seized and searched when supply chains extend through states that have yet to legalize recreational marijuana. In this case, not only is your source cut off but you also risk being charged with drug trafficking – a felony offense.
In turn, businesses wanting to avoid such infractions and interruptions are advised to plan out their supply chain and research all state regulations early on.
Decades of classifying marijuana as an illegal substance in the U.S. continue to follow cannabis-related businesses. These factors may influence your perceived reputation and where you can open a shop. Stemming from these assumptions:
- Communities frequently resist cannabis businesses, believing they will sell product to minors, attract crime and lower property values.
- There will be additional traffic, inviting customers assumed to be lazy or drug addicts.
Yet, legalization of marijuana and subsequent cannabis businesses can have the opposite effect. A study published in Regional Science and Urban Economics found that legal cannabis dispensaries lower local crime by nearly 20 percent.
You’re a Target for Crime
Due to decades of criminalization and misalignment between federal and state regulations, cannabis dispensaries and other businesses are targets for crime because:
- It’s assumed you only carry cash. State-level banks may refuse to do business with cannabis dispensaries due to federal regulations, thus blocking you from setting up a business bank account. This results in having to keep large amounts of cash around that could easily be stolen. It’s estimated that 70 percent of cannabis businesses are cash-only without any type of banking relationship.
- You’re an easy target. Opening a regulating cannabis businesses is a new landscape. Criminals may pose as regulators to scope you out or hackers target your website.
Other Business-Related Risks
At the end of the day, cannabis businesses carry the same risks as any other commercial entity. These include:
- Accidents on your grounds, including your facility, warehouse or growing fields
- Crop failure, reducing what you can sell during the year
- Natural and other disasters, including fires, storms and floods
- Theft of merchandise and equipment
- Product liability due to improper labeling
Are you starting a cannabis business in Connecticut? To anticipate the risks and stay protected, discuss insurance policies, contact a HUB/Ion Insurance agent today.