17 Sep ebook: The Major Risks of Operating a Cash-Only Cannabis Business…and How to Mitigate Them
Until lawmakers help remove banking restrictions and regulations like the SAFE Act are passed, cannabis businesses will face ongoing banking challenges. But, that’s not stopping the cannabis industry from expanding. Cannabis and cannabis-related businesses continue to find workarounds and alternative options—often settling on running cash-only businesses. Startup cannabis businesses, for example, face high competition in the industry and have the urgency and pressure to open their doors as soon as possible. With limited financial options available, a cash-run operation may make the most sense.
Running cash-only business may seem cheaper and faster than securing one of the few banks and credit unions that work with cannabis businesses. However, doing so creates significant safety, financial, and legal risks. Cannabis businesses need to be aware of these risks and how to mitigate them. And, at the end of the day, cannabis businesses must follow regulations and take proper precautions to help keep your customers, employees, and business safe from physical and legal harm.
Due to limited financial options, an estimated 70% of cannabis businesses resort to cash-run operations. – Forbes 2020
INTRODUCTION
Until lawmakers help remove banking restrictions and regulations like the SAFE Act are passed, cannabis businesses will face ongoing banking challenges. But, that’s not stopping the cannabis industry from expanding. Cannabis and cannabis-related businesses continue to find workarounds and alternative options—often settling on running cash-only businesses. Startup cannabis businesses, for example, face high competition in the industry and have the urgency and pressure to open their doors as soon as possible. With limited financial options available, a cash-run operation may make the most sense.
Running cash-only business may seem cheaper and faster than securing one of the few banks and credit unions that work with cannabis businesses. However, doing so creates significant safety, financial, and legal risks. Cannabis businesses need to be aware of these risks and how to mitigate them. And, at the end of the day, cannabis businesses must follow regulations and take proper precautions to help keep your customers, employees, and business safe from physical and legal harm.
SAFETY RISK
Operating a cash-only business is a significant safety risk for everyone involved, including customers, employees, suppliers, vendors, and your business. These businesses can attract bad actors, internally and externally. Sales transactions, deposits, and vendor and employee payments all need to be made in cash, elevating the risk for the theft and robbery.
Cash-only dispensaries are prime robbery targets.
A Marijuana Business Daily article reports that thieves are the biggest threat to cannabis retail stores and medical dispensaries. Businesses in Chicago, Sacramento, Los Angeles, Detroit, San Diego, and Seattle are just a few that have experienced robberies. In 2019, Denver hit a three-year high with six related armed robberies. Many assume that the product attracts crime, but instead it’s often the lure of high amounts of cash on site and limited security. Morgan Fox, media relations director for the National Cannabis Industry Association says, “In the early days, product alone was maybe enough to be a real draw for thieves, but cash is much more attractive.”
If your business must operate as cash only, you will need to invest in surveillance equipment with live monitoring and technology to control access to rooms and registers, provide safety and emergency training to all employees, and hire an armed security guard. These security measures are required in some states and can help mitigate robbery and theft.
Internal theft accounts for majority of financial loss.
About 90% of all loss is attributed to employee theft. Employees operate the POS system with cash-only transactions, are paid in cash, and know there’s a safe onsite and an armored car that makes regular visits. Aside from having strict protocols in place, dispensaries can decrease the chances of internal theft by implementing employee check-in and check-out procedures, which includes a thorough bag check, and vetting their employees for integrity and trustworthiness through extensive background checks and references.
Traveling with significant cash amounts is a high-risk activity.
Paying your suppliers, vendors, and remote employees can be complicated. When you don’t have a bank account and have to pay them in cash, you’ll have to risk mailing cash, request a money order, or travel long distances to pay by hand. Similarly, travel is often required to pay taxes in cash at the state office. It is very common for an owner or employee to be traveling with thousands of dollars in a bag to pay in person. Despite having legitimate company paperwork and being in good standing with the law, traveling with this amount of cash is not only a suspicious activity to any government agency, but it is also very dangerous.
The Los Angeles Times reported in 2017 that a cannabis manufacturer had an accountant stopped by officers in a small Southern California city while transporting about $30,000 to the company’s headquarters. Despite showing police her paperwork, they confiscated the cash because, they said, they suspected money laundering. At the time the article was published, the company was working with an attorney to get it back.
FINANCIAL RISK
The opportunities for increasing revenue can be minimal when operating as a cash-only business. Minimal revenue opportunities combined with added costs for labor and equipment can put your business at a huge financial risk.
Cash transactions often affect the cart size.
Cash-only payments harm dispensaries in several ways. To start, if marijuana stores only accept cash, many customers might opt to shop at a retailer where they accept some form of electronic payment option. That’s a lost customer, a lost sales opportunity, and possibly future opportunities.
Many customers are fine using cash or using an ATM onsite to get cash. However, their average purchase amount is significantly lower than a customer that can pay with a credit card. It’s been proven that when people have the ability to pay with plastic, they spend as much as thirty percent more. This can lower the opportunity for increased revenue and reduces the chances for impulse buying or upselling.
ATMs are expensive for both the business and the customer.
Businesses that have ATMs onsite must pay monthly fees to use the machines. These costs are often higher than normal fees because of federal marijuana laws. To offset these costs, businesses often mark up prices or reassign the fee to the customer. If they withdraw cash, they will have to pay the terminal fee, possibly their own bank fees, and potential fees imposed by the dispensary to help pay with ATM operating costs.
Security equipment, labor, and insurance costs may add up over time.
It costs cannabis businesses thousands of dollars in monthly fees just to have a bank account at the few banks and credit unions that serve the industry. Due to this expense, many businesses decide against working with a bank. However, the financial costs of operating a cash-only cannabis business can add up over time and can often outweigh the costs of working with a bank or credit union. Here’s what costs to expect:
Comprehensive Security Technology
Operating a cash-only business comes with a high security risk and business owners are recommended to have state-of-the-art security technology to avoid financial loss. Camera systems or alarms that only cover a portion of the building or operation can leave the business exposed to theft. Cannabis businesses should invest and install comprehensive camera and alarm systems, check-in systems for those entering the facility, and hire dedicated security staff.
Some states where cannabis is legal (medical or recreational) require all dispensaries to take extensive security measures. For example, California requires dispensaries (regardless of what payment methods they accept) to implement:
- ID badges for all employees
- Limited-access areas within the facility
- Security personnel
- 24-hour video surveillance of all areas containing cannabis products and all point of sale areas
- Alarm systems
- Commercial-grade locks
- Secure storage of all cannabis products
Since the security risk is higher for cash-only businesses, you should work with an insurance provider and security company that serves cannabis businesses to go above and beyond any state requirements. If your business is storing thousands of dollars on site, you’ll want to invest in a larger safe and an upgraded POS system to improve product tracking and inventory, monitor employee activity, and avoid cash shortages from sales transactions.
Insurance
While insurance coverage can help increase safety and security, it can also be challenging and expensive to find adequate coverage for businesses like dispensaries and retail stores. According to a 2020 report, there are currently only six insurers offering cannabis coverage with most insurers are offering $1 million per occurrence/$2 million aggregate policies in commercial and general liability, property damage, and product liability coverage. However, many businesses may need limits up to $5 and $10 million, or more. Businesses will have to pay for the coverage plus implement additional recommendations given by the insurer, such as hiring a security team to manage compliance or purchasing a larger vault (800lbs in some cases for cultivation).
Cash Counting & Handling Resources
Managing cash comes with a hefty cost. One cannabis business’ accountant reports that his client has 60 employees with an accounting team of four plus a controller. “The company spends $325,000 a year in salaries to the people managing the cash handling and estimates it loses $1 million a year to the various burdens cash imposes.” That’s a significant expense to ensure your cash transactions are accurate and deposited appropriately.
LEGAL RISK
Operating cash-only cannabis businesses take on many legal risks. While paying employees and imposing cash-only transactions are not illegal, there is significant room for error and inadequate tracking that often causes the government to monitor your business closely for illegal activities.
Paying employees in cash can lead to legal trouble if not done correctly.
Even though paying employees in cash may be the easiest and fastest way to distribute payment to employees, payroll errors can lead to penalties with the IRS or the DOL. Here are some areas that become complicated when using cash for payroll:
Withholding taxes. Deducting taxes can be more complicated with paying in cash; however, failing to make the deductions (or making mistakes with calculating taxes) can lead to legal trouble with the IRS. Many businesses will consider employees independent contractors to circumvent tax complications. However, contract employees must fill out a 1099 form for appropriate classification and wages must be reported to the IRS. Employee misclassification could mean severe fines and penalties if the cannabis business is audited.
Providing adequate payroll documentation: Wage statements include the payroll date, the amount paid, and if any taxes were withdrawn. Proof of payment is also a method of documentation that shows an employee received their payment. Both pieces are required in many states regardless of the method of payment. However, when a cannabis business does not have a payroll system in place and pays employees in cash, it can be challenging to provide wage statements and proof of payment. If they are not required, they can be easily forgotten or overlooked. What the business may not realize is that failing to leave a paper trail puts both the business and the employee at risk. If a paycheck stub cannot be generated, a receipt must be handed to the employee and appropriate records must be kept to verify wages and employment payments.
Government audits are more likely.
Cash-only businesses are being watched closely by the IRS and federal government agencies for crimes like money laundering and tax evasion. Because many big banks will not serve cannabis or cannabis-related businesses, many businesses funnel their cash through a shell company or use a different business name. While cannabis businesses feel like they have no other option, such activities start to look like money laundering to the government.
In addition, operating a cash-only business makes it difficult to track a business’ finances and ensure they are paying their taxes accurately. Cash-only businesses are often suspected of tax evasion in these situations. Because these backdoor activities and workarounds have to happen to run and manage a cannabis business, they are more likely to be audited to ensure the business is following the law.
Reduce Risk & Liabilities with the Right Banking Assistance
Finding a reputable cannabis bank comes down to a few characteristics. These include whether your money is FDIC insured, whether you can transfer money via automated clearing house, and whether money is available through checks and wires. One common red flag to watch for, however, is limits to cash deposits. A reputable bank has a network of armored carriers, capable of transporting any amount between a few hundred thousand dollars to a few million. If your banking provider has strict, low limits on amounts to transport, they may not be the right fit for your business.
No matter which financial provider you choose, know that your investment can help reduce your financial, safety and operational risks. Transactions are traceable and regulatable, and although it may be costly upfront, paying fines, penalties, and even losing your business will cost more in the long run.
Work with a PEO to Facilitate the Search for a New Banking Partner
It’s already challenging to find banking and financial institutions that work specifically with cannabis businesses. But, of those available, you have to take the time to vet the right ones that truly understand your business’ needs, support your business, and will partner with you for the long-term. As a business owner or manager, you have other priorities weighing on you, so you should consider hiring a Professional Employer Organization (PEO) to secure the right banking relationships and manage payroll and compliance.
OROleafhr understands the ongoing challenges cannabis businesses like yours are facing. We partner with you to learn your cannabis business’ needs and connect you with the established banking relationships and technology infrastructure to support your business. OROleafhr is also skilled in cannabis regulations and employee law to protect your business from legal trouble. Partner with OROleafhr and enjoy cost-effective, full-service HR management, including benefits administration, payroll processing, workers compensation, and risk management.
Avoid the risks of operating a cash-only cannabis business. Contact OROleafhr to build better banking relationships.
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