The market for cannabidiol was estimated to be worth USD 2.8 billion in 2020, and from 2021 to 2028, it is anticipated to increase at a CAGR of 21.2%. Multiple CBD agencies are now opening up globally. By 2025, the U.S. cannabis market can reach $45.8 billion, and as of early 2022, it was responsible for over 420,000 jobs in the country.
Cannabis firms without conventional tax deductions and sufficient banking access may be impacted by President Biden’s announcement to examine cannabis’ Schedule I classification. However, the sector faces various difficulties, such as a lack of rules, problems with hemp payment processing, and banks’ unwillingness to cooperate.
Different Challenges For Hemp Business
One can learn the difficulties the business owners face in this highly regulated marketplace, along with what CBD corporations can do to solve these problems.
1. Transparency And Credibility
Most of the market is still unregulated. Businesses in the industry may view this as both a benefit and a drawback. Doing business in a region where it is not legal carries significant risks, but it also offers significant development potential because only some agencies have yet to monopolize the market.
One can establish credibility with the customers through transparency when entering new markets, especially risky ones. People need to know that one’s business is legal and be transparent if the owners want people to trust them enough to give their money.
2. Relying On Accounts From High-Risk Merchants
It’s getting difficult for new CBD businesses to penetrate the marketplace without well-established brands as the market grows more crowded. High-risk merchant accounts are frequently used by new businesses to expand their reach quickly and generate revenue as soon as they open for business.
Although CBD products are legal in different places globally, banks often need to be more willing to accept CBD companies as clients. As a result, acquiring a bank account for new CBD businesses might be difficult or require collaborating with other service providers who can assist them in obtaining a high-risk merchant account. The enterprises must look for alternative payment solutions to open a merchant account or identify other high-risk networks that will accept CBD clients.
3. Federal Regulations
Due to their concern with federal policymakers, financial institutions have avoided working with companies offering cannabis services. The Patriot Act of 2001 included regulations requiring financial institutions to know not only their clients but also their customers’ customers, as well as merchant payment processors, money services businesses, and money transmitters.
Most people in the cannabis industry are mainly ignoring the intricate network of federal regulations regarding due diligence measures, including Anti Money Laundering (AML), Customer Identification Programmes (CIP), Financial Crime Enforcement Network Reporting (FinCEN), and Know Your Customer (KYC). These regulations were developed to restrict money laundering by criminals and to stop funds from falling into the hands of terrorist organizations.
Sadly, these efforts were unsuccessful. Cannabis is a lucrative industry with anonymous consumer activity, making it extremely difficult to identify and trace customers as federal regulations require. Financial firms are being heavily monitored and are reluctant to take the chance that raids and federal audits will result in the seizure of their assets. As a result, the payment card and banking industries have essentially turned their backs on cannabis operators.
4. Acceptance Of Cryptocurrency
The financial sector, specifically how CBD agencies conduct business, has immense potential for drastic change due to Blockchain technology. Quick transactions are made possible by cryptocurrencies by offering high security.
Since cryptocurrencies enable quick global transactions and low-risk sales, several CBD agencies are already embracing them as alternate payments. The only current disadvantage is that retailers must pay high transaction fees when utilizing cryptocurrencies, but this might quickly change if more people start using them.
5. Regulating Cannabis
In many ways, the CBD market propels the business forward, but when it comes to payment, this is very complex. While simultaneously outlawing all other cannabis varieties, many nations have made CBD entirely legal. This has left customers needing clarification about what can be bought and where.
Because of the uncertainty surrounding the legality of the products across different country jurisdictions, hemp firms find it challenging to advertise. As a result, they need help to make significant investments in marketing or promotional materials. Additionally, as there is no method for healthcare experts to determine whether CBD comes from cannabis crops or hemp, they are reluctant to promote CBD products due to worries about its efficacy. When determining how to receive payments, CBD authorities must consider these issues.
6. Obtaining Finance
The first challenge that business owners encounter is getting investment. Cannabis-related enterprises require significant capital outlays for retail outlets and production facilities. Typically, traditional bank financing is not available. Although some state-chartered financial institutions may be able to avoid these rules, they frequently want to avoid operating in the shadows because most banks are subject to federal laws.
Due to the difficulty of obtaining traditional bank financing, many startup cannabis enterprises now rely on private investors for funding. Nonrecourse loans from private investors do not provide this particular tax treatment, unlike ordinary nonrecourse loans that let losses be written off. This can be difficult for a company that already has low-profit margins.
7. Compliance For Sales Tax
The main reason for state legalization of cannabis is to generate more taxable income by imposing excise and sales taxes on transactions. The challenge is how firms manage the reporting and filing requirements associated with these taxes, which can be complex and challenging. It is crucial to develop the proper reporting system and process to collect the necessary data during sales.
Given the nature of the product being sold, marijuana businesses will be subject to intense scrutiny for compliance and accuracy. The businesses’ reporting procedures and supporting documentation must stand up to scrutiny, as audits will be regular and thorough.
8. Disadvantages Of Federal Tax
Despite being legal for business in some states, cannabis remains illegal under federal law. As a result, the enterprises are constrained by Section 280E, which forbids using federal tax credits and deductions. Business owners selling cannabis legally still have to pay federal income taxes on their profits.
Deductions for non-product expenses are not allowed, although they are for the cost of sold items. This includes overhead costs like advertising and payroll, which may account for as much as 50% of the company’s overall costs. Compared to enterprises in more laxly regulated industries, marijuana businesses have a higher burden of proof. Marijuana firms must therefore maintain extremely accurate records and files.
The turning point might be near as cannabis legislation advances nationwide and federal officials discuss cannabis banking options. Flexible laws for federal-level financial services for the cannabis business are already on the table, and federal authorities are keeping an eye on the balance. However, the cannabis sector will not suddenly find banking and payment processing simple. Banking will remain difficult despite new legislation.