The Challenges of Starting a CBD Business

Ezra Cabrera

Updated: February 12, 2019
CBD merchant account Shopify

The CBD industry is bigger than ever before and growing with no end in sight. The market is projected to grow from $688 million in 2016 to a whopping $1.8 billion by 2020. Despite its growing popularity, CBD oil is still illegal in multiple states (as well as on the federal level), which creates challenges for businesses entering the space. For example, businesses selling medicinal CBD products need to apply for a special license that can be difficult to obtain. For online retailers, it’s hard to create a CBD merchant account Shopify, especially with their tightening rules, seeing that retailers cannot sell CBD products or process transactions through Shopify Payments.

Related: 5 Tips to Qualify for a Merchant Account for Online Hemp Businesses

Even though the legal regulations of CBD businesses continue to evolve in various states, it’s still considered to be a part of the high-risk sector. Plain and simple, companies in the hemp industry face stringent legal regulations because of the nature of the business. That’s why they’re considered as a high-risk business.

If you’re looking to start a CBD business, here is a list of challenges you might face along the way:

1. Negative Perception of CBD Products/Businesses

Many people associate hemp products with marijuana, which is still an illegal substance in several states. Hemp and marijuana do come from the same family (cannabis), but they do not share the same chemical composition. Marijuana contains a much higher composition of THC (15-40%), the compound found in cannabis that can induce psychoactive effects. On the other hand, hemp contains an extremely low concentration of THC (0.3% or less).

However, in reality, people often use hemp and cannabis interchangeably. Because of that, a lot of misunderstandings and misconceptions could arise. With a lot of information accessible on the internet, it can be difficult for the people what pieces of information to believe. Because of that, more and more CBD business owners are finding it hard to navigate through the industry.

2. Conflicting Laws

CBD businesses are considered high-risk because the substance is still illegal on the federal level. Credit card processors and banks do not want to spend extra resources ensuring that a CBD business looking to open a merchant account is compliant with the legal stipulations. This is why CBD businesses often go to foreign banks and/or processors outside the United States for financing. These types of lenders usually hold funds for weeks at a time.

3. Tightening Regulations

In 2018, the hemp production was finally legalized when President Donald Trump signed a farm bill which removed it from the controlled substance list. The same bill allowed the hemp products to be insured. However, even with the legalization, many business owners still face some challenges. For one, the government could still stop hemp and CBD production whenever they want. Because of the ban, many CBD businesses could experience decrease in production and, therefore, in sales. As a result, a lot of CBD merchants can go out of business.

4. Payment-Related Issues

CBD and hemp business is a high risk business. Because of its nature, a lot of credit card companies are reluctant in allowing these types of businesses to transact through their platforms. As a result, CBD merchants are left with no choice but to resort to cash-based transactions which is a riskier business transaction.

5. Shipping Legalities

While CBD and hemp has been made legal in many states, there’s still the question of shipping legalities across state lines. Some states are banning hemp production within state borders making it more difficult for suppliers to get their products to the its destinations. The products could be confiscated leaving the merchants suffering for their losses.

6. Expensive Licensing

Of course, you’d need to have a valid license to operate a CBD business. However, the costs for applying for a license and business permit for CBD distribution could be high. On top of that, there is no assurance that your license application will be approved by the state.

7. Credit Card Processing Challenges on CBD Merchant Shopify

PayPal, Stripe, and other credit card processors refuse to transact with CBD merchants due to the nature of the business. Even if a processor will work with CBD businesses, there’s always a risk they may have a change of mind with little to no prior notice. CBD products that make ‘unsubstantiated’ health claims that have not been evaluated by the FDA,  will likely find it extremely difficult to find a credit card vendor.

Related: CBD Businesses: The Challenges of Setting Up a Merchant Account

Hemp and CBD business are, without a doubt, a high risk business. For that reason, a lot of merchants are finding it hard to maintain their business operations. Moreover, the challenge of setting up a CBD merchant account on Shopify makes it even more harder for these businesses to sell and collect payments. However, despite the challenges, the industry remains to be a profitable one.

 

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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