Last month, Minnesota became the 23rd state to legalize recreational use of cannabis, and observers expect at least a couple of other states to follow suit this year. But while cannabis legalization efforts continue on the state level, the drug remains criminalized federally, and even in places where it’s legal, proprietors of cannabis businesses face a bevy of risks, including their profits going up in smoke. Scott Solomon of Operational Security Solutions explores the complex issues at hand.
Cannabis offers both a high-risk environment and daunting compliance requirements that most other industries don’t have to worry about — leading to legal cannabis businesses using their own staff with backpacks or gym bags to move large volumes of cash, with the potential for tragic consequences.
The legalization of cannabis in multiple states has opened up new economic opportunities but also presents safety concerns and unique challenges for businesses. One such challenge is the safe and efficient management of cash transactions, which dispensaries require due to credit card companies prohibiting cannabis payments. This means cannabis retailers must find ways to safely transport their products and, once sold, move the profits to a bank where they can be deposited. Cash-in-transit (CIT) in the legal cannabis industry is subject to hurdles that can hinder growth, compromise security and hamper overall operational efficiency.
Theft risk and burden of tracking
Cannabis is easily convertible to cash almost anonymously, and the ease of product conversion, plus the fact that the majority of commerce is forced to take place with cash, all present an attractive target for thieves. One of the biggest sources of loss for cannabis businesses is internal theft, forcing business owners to enhance internal security systems, staff and also the use of smart safes.
With federal banking restrictions limiting access to traditional financial services, legal cannabis businesses predominantly rely on cash transactions. This heavy reliance on cash introduces significant theft risk. The burden of tracking and securing cash becomes a major concern, requiring extensive security measures and heightened vigilance. Such precautions can be expensive, eating into the already tight profit margins of cannabis businesses.
Unlike other businesses, legal cannabis is also required to comply with state-mandated track-and-trace systems, and all products must be tracked from “seed to sale.” This requirement places a heavy administrative burden on businesses, as well as the associated expense of transaction monitoring software.
Red-tape battles, cash ‘problems’ and safe practices
The unique nature of the legal cannabis industry leads to difficulties when attempting to deposit cash at financial institutions. Due to federal laws, many banks are reluctant to serve cannabis businesses, fearing legal repercussions. This creates a cash-flow problem for the industry, forcing businesses to store and transport large amounts of cash.
The lack of access to banking services not only exacerbates security risks but also hampers business growth, hindering investment opportunities and limiting access to capital. Collaboration between the cannabis industry, financial institutions and regulators is imperative to find sustainable solutions to this ongoing issue.
The legal cannabis industry is heavily regulated, which adds an additional layer of complexity to cash management. Businesses must navigate through a maze of regulatory requirements, compliance measures and reporting obligations. This red tape often creates delays and administrative burdens, making the process of handling cash more arduous. Compliance with strict guidelines and record-keeping practices further adds to the challenges of cash management. Streamlining regulatory frameworks and enhancing coordination between state and federal agencies is crucial to alleviate this burden.
According to the Small Business Administration, an “average” small business with fewer than 20 employees generates more than $7 million in revenue per year. Small-business owners we have encountered handle between 80% and 90% of their revenue in the form of currency — or roughly $600,000 a month or $130,000 every week, using SBA’s average revenue figure. This creates a burden for the business owners and a safety concern for the employees and customers alike. If the legal cannabis business is able to qualify for a bank account with a state-chartered bank or credit union in a state where cannabis has been legalized, then they need to get their cash into their account. Taking $130,000 in cash to a bank every week is a massive safety concern.
Many banks have implemented policies restricting cannabis businesses from depositing amounts exceeding $5,000 at a physical branch. This measure is intended to minimize inconvenience to traditional business clientele and mitigate potential security risks, but this means that even a moderately successful cannabis business would simply be overflowing with cash.
The existing banking infrastructure is ill-equipped to facilitate extensive commercial transactions for these entities unless they’re able to engage a cash-in-transit service possessing the requisite permits and licenses to safely collect and deposit their cash. Moreover, the limited access to branch services exacerbates operational difficulties, presenting yet another hurdle when attempting to get smaller notes or change for their cash registers.
Managing costs of goods
The legal cannabis market also has substantial overhead costs, including cultivation, production and compliance expenses. With regulations come added compliance procedures, red tape and expenses. Moreover, the absence of banking services and access to loans deprives businesses of potential cost-saving measures and hinders their ability to invest in modernizing their operations. Industry stakeholders, including policymakers and financial institutions, should collaborate to explore innovative financial solutions tailored to the unique needs of the industry.
It’s important to remember that the security industry also has fixed and variable expenses that continue to rise. Providers are required to pay for specialized permits and licenses to operate in each state, specialized armored vehicles, tracking, security and other alarm systems, as well as a premium for personnel with years of law enforcement, military or security experience.
The resultant ecosystem that both of these businesses must operate in is expensive. But the cost of losing a significant portion of your revenue because of theft or seizure jeopardizes any chance at sustainable profitability. The cost of harming employees, customers and the public could jeopardize everything.
An evolving market
As the legal cannabis market continues to evolve, new challenges will emerge alongside opportunities. The increasing number of states legalizing cannabis for both medicinal and recreational use necessitates a proactive approach to cash management, including exploring emerging technologies like blockchain, digital currencies and secure banking solutions specifically designed for the cannabis industry. Encouraging innovation and creating an environment conducive to responsible financial services will pave the way for a safer, more efficient and sustainable cash management landscape.