It’s not every day that a whole new industry becomes ubiquitous in American life overnight, but one-third of Americans now live in a state with legal recreational marijuana, which means that cannabis dispensaries and cultivators are springing up at an incredible rate. Each state with legalized cannabis has its laws and regulations on dispensary locations, taxes, accounting practices, and more. Many states require the operators of these businesses to purchase marijuana surety bonds to ensure that cannabis businesses follow these laws. This guide will help you get familiar with the process to purchase a marijuana bond for your dispensary.
What Is a Cannabis Surety Bond?
We can start our exploration of cannabis surety bonds with this simple question: What is a surety bond? Basically, it’s a contract between three parties that guarantees an obligation between two parties, using the third (called a surety) as a neutral guarantor. In this case, the dispensary is the party with the obligation (known as the principal), and the state government is the party that requires the surety bond (known as the obligee). If a dispensary violates the terms of the surety bond, the government can file a claim with the surety. After giving the principal a chance to pay, the surety will pay the government’s claim, but the dispensary must fully reimburse the surety for any money it pays out.
Dispensaries aren’t the only kind of businesses that require surety bonds. Construction contractors, mortgage brokers, public insurance adjusters, and auto dealers are just a few examples of businesses that usually have to purchase a bond. In the next section, we’ll talk about how to tell if your dispensary requires a surety bond.
Who Needs a Cannabis Surety Bond?
In most states, cannabis dispensaries have to purchase surety bonds as part of their license application process. Check your state’s cannabis dispensary regulations to learn whether your state requires a cannabis surety bond for dispensaries, as well as many other important facts about the requirements of the dispensary licensing process.
Many states require different types of cannabis bonds, depending on what kind of license you’re applying for. Growers, distributors, and dispensaries, for example, all need different surety bonds in California. Thus, when you’re shopping for a cannabis surety bond, it’s crucial to research the specific types of bonds available in your state and ensure you select one that covers dispensaries.
Four Steps to a Surety Bond for a Dispensary
Here’s how the process of getting a dispensary surety bond works:
- Apply for a bond with a surety or surety bond broker. You’ll usually only need your business’s basic information to apply.
- The surety will use its underwriting process to determine your premium. They’ll provide you with a quote.
- You’ll have the option to purchase the bond or shop for a better premium.
- After purchasing the bond, you’ll file the paperwork with your state’s cannabis regulatory authority when applying for a dispensary license. In some cases, the surety may be able to file it for you.
In the next sections, we’ll break down some of the most important elements of this process.
How Much Does a Cannabis Surety Bond Cost?
To purchase surety bond coverage, a principal has to pay a premium to the surety company. There are two major factors in the premium that you’ll pay for a cannabis surety bond:
- The coverage amount of the bond (also called the penalty sum). This is the maximum amount that the surety will pay out to a claim filer. The premium you’ll pay for the bond is a percentage of the coverage amount, which means that a bond with a higher coverage amount will cost more.
- The principal’s financial and legal history. Sureties prefer to insure principals who are unlikely to cause a claim, so they use an underwriting process to assess the principal’s risk. Someone with bad credit, a history of surety bond claims, or other negative credit factors will pay a larger percentage for their premium.
This means that it’s often more difficult for people with credit problems to get the surety bonds they need to open a dispensary. However, getting a surety bond with bad credit isn’t impossible, as some sureties will work with people with credit issues.
Where Can I Buy a Cannabis Surety Bond?
In states that require a marijuana surety bond, cannabis entrepreneurs should be prepared to purchase a marijuana bond as part of the process to become a licensed dispensary. Businesses can purchase surety bonds in one of two ways: directly from a surety or from a surety bond broker.
One method is to contact a business that offers surety bonds—usually an insurance company—and apply for the surety bond you need. The surety will provide you with a quote for your bond premium, but, often, you’ll pay more than necessary if you go with the first surety from which you get a quote. It’s a smart move to shop around for a better premium from multiple sureties.
The second method, using a surety bond broker, is one that successful cannabis businesses often use to speed up getting a surety bond. These brokers work with many different sureties, and they purchase bonds from the sureties at wholesale prices. That means dispensaries can often get lower premiums and faster service by working with a surety bond broker instead of shopping around one surety at a time.
How Can I Find a Reliable Surety?
In a business like the marijuana industry, where regulatory compliance is heavily scrutinized, it’s always important to know that the surety backing up your obligations is financially sound and committed to its obligations. Reliable sureties:
- Should provide free, no-obligation quotes to customers
- Should offer transparent bond pricing without hidden fees
- Should offer the option, when available, to file your bond paperwork with regulatory agencies for you
- Should provide friendly customer service and guide you through the bond application process
Dispensaries are one of America’s hottest new business sectors, but remember that success will require strict compliance with the law. Cannabis surety bonds are one indispensable part of the picture.