Is It Too Late to Start a CBD Business?
Under the 2018 farm bill, commodity hemp production was federally legalized in the U.S. and, ever since, the hemp-CBD industry has been booming. According to a marketing analysis by Grand View Research, the global industrial hemp market size was valued at $5.33 billion in 2020 and is projected to grow to $15.26 billion in 2027. A lot of people may be seeing this flourishing industry and are asking themselves, “Is it too late to start a CBD business?” and the answer is no, it is never too late! While there may be some obstacles to maneuver when starting your business, including finding credit card processors and banks that are willing to work with you, as well as differentiating yourself in an already saturated market, starting a CBD business with success is more than attainable.
The Challenges of Starting a CBD Business
While many start-up businesses face various obstacles when first starting out, the CBD-hemp industry has its own unique challenges to consider. Due to the nature of the industry and the strict legal restrictions on hemp and CBD products, all CBD-hemp businesses are considered high-risk businesses. A company is considered a high-risk business based on two conditions: it operates within a high-risk industry and risk of financial failure exits. Both of these circumstances might affect your company’s ability to acquire financing, insurance and merchant accounts. If that’s not challenging enough, you must also consider the fact that the CBD industry is already highly saturated.
Credit Card Processors
As a high-risk industry, CBD companies are prone to payment card fraud and charge-backs. Subsequently, many credit card companies refuse to allow these types of businesses to transact through their platforms. Even more grueling is the fact that the CBD industry, as well as other high-risk industries, are at risk of losing credit card processing capabilities altogether. In fact, CBD’s sister industry, the marijuana industry, just lost its credit card processing capabilities at the end of May 2021 due to changing regulations.
You may be asking yourself, “Then, what are my options?” The solution is to find a credit card processor that will be willing to take the risks associated with this type of transaction. Some of these processors include PaymentCloud, Easy Pay Direct, SMB Global, and Square. If, in the future, the CBD industry follows in the footsteps of the marijuana industry and loses credit card processing capabilities, you can easily find a third-party processor—a service that lets you accept online payments without a merchant account of your own. Obtaining third-party processing, however, almost always means higher transaction fees than a traditional payment gateway-and-merchant account setup.
Considering that credit card processors and their acquiring banks are one in the same, finding a bank that is willing to work with your hemp business can also be somewhat tricky. The problem is that there has been little to no clear direction on distinguishing legal hemp and federally illegal marijuana, leaving banks uncertain about the legality of working with hemp and CBD businesses. This uncertainty can result in banks turning away hemp businesses, ultimately leaving them unsure of how to set up a bank account and receive financing for their business.
In the letter sent by the American Bankers Association (ABA) to the heads of U.S. financial regulatory agencies, the association states that “banks want to serve their communities and support their local economies but need clear, unequivocal assurance from their regulators that hemp is distinguishable from cannabis, and that serving the industry will not expose them to criminal and civil liability, or regulatory censure.” Banking institutions who are willing to work with your CBD company must subject you to enhanced scrutiny for risk assessment. Some CBD-friendly banks include Silicon Valley Bank, Chase Bank, North Bay Credit Union.
With 5,000 active CBD-hemp brands in the U.S. and Europe, the CBD market is becoming increasingly saturated. Market saturation happens when a specific market is no longer generating new demand for certain products or services. This can happen for a number of reasons but, in the case of the CBD industry, the saturated market is ultimately due to high competition. With a continuous flood of new entrants as well as established line extensions creating CBD products, it may be difficult to enter the CBD industry since consumers are already overwhelmed with many of the same or similar products.
How Can You Succeed in the CBD Industry?
Each state may vary in terms of hemp laws and, while legalities may be unclear in some states, the best thing to do is research your state’s status on the legality of hemp-derived CBD. Once you have a better understanding of the laws and regulations in your state, the easier it will be to take the first steps in starting your business. In terms of finding a credit card processor and bank that are willing to work with your CBD business, do your research. Any of the credit card processing companies and banks listed above take on high-risk businesses and are CBD-friendly.
While the CBD market is becoming increasingly saturated, there is still room for companies looking to differentiate themselves from the rest. Many CBD companies today sell very similar, if not the same, products. For example, the market is flooded with companies selling products using CBD isolate. While the use of CBD isolate is seen as a legally safe way to enter the market—considering that isolate is really THC-free—these types of products consistently fall short of producing effects that consumers desire such as pain and anxiety relief.
One way you can stand out is to use different or less common extraction processes. For example, Vera Herbals utilizes two very different and unique extraction methods—spagyrics and rosin—which allow us to not only create high-quality, effective products, but also help us stand out from competitors. While finding your niche in the market is very important, other ways you can succeed in the industry include narrowing your audience, branding your product, and effectively telling a story behind your brand.
Starting your own CBD business can be challenging in some aspects but rewarding in the long run. While the CBD-hemp industry may present some obstacles due to the high-risk nature of the industry, such as finding a viable bank and credit card processor, these challenges are easy to overcome with just a little bit of research. Thriving in an already saturated market, however, may be more daunting and will require an in-depth plan to differentiate your business from competitors. So, is it too late to start a CBD business? Not if you are willing to take the time and patience to research, ask questions and learn about the everchanging industry that is the hemp-CBD market.
Anderson, Jerry. “What is a high risk business?” Small Business – Chron.com, Chron.com, 21 Nov. 2017, smallbusiness.chron.com/high-risk-business-723.html.
Cabrera, Ezra. “The challenges facing CBD start-up businesses.” SMB Compass, 24 May 2021, www.smbcompass.com/challenges-starting-cbd-business/.
“CBD financing: Find hemp-friendly banks + CBD investors (2021).” BigCommerce, 30 May 2021, www.bigcommerce.com/articles/selling-cbd-online/cbd-financing/.
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