Michigan isn't just competing with California in the regulated recreational marijuana market; it's also matching California in unpaid invoices.
Brett Gelfand, managing partner at Cannabiz Collects in St. Petersburg, Florida, and founder of the Cannabiz Credit Association noted that Michigan's regulated adult-use market is now one of the worst for unpaid debts.
Turns out one way to make money in competitive cannabis markets is not pay your bills.
"Oregon and Colorado used to be major states for us in terms of collection activity," Gelfand said. "But many of those companies have been weeded out, and now, we don’t see much volume from Colorado and Oregon anymore. In newer markets like Michigan, however, it's becoming a growing issue."
Just how big is the problem? Delinquent payments in the regulated U.S. cannabis industry are projected to exceed $4 billion in 2024, according to Whitney Economics, an Oregon-based cannabis data and research firm.
Gelfand discussed how plant-touching companies can adopt best practices for managing accounts receivable and breaking the cycle of debt in a recent interview, where he answered the following questions.
What is the main factor leading cannabis companies to delay invoice payments?
The primary issue is banking and capital access.
Without access to credit cards or regular capital, as non-cannabis businesses have, cannabis companies often rely on trade credit instead of operating capital. This forces many cannabis businesses, without the formal training that banks have, to function like banks themselves.
When a company offers net-15 or net-30-day payment terms, they’re essentially acting as a bank. But unlike banks, which would assess a credit profile, secure a lien, or demand a personal guarantee to safeguard against non-payment, cannabis companies often lack such recourse. In the cannabis industry, it’s almost a free-for-all.
Cannabis businesses feel pressured to extend credit to make sales, fearing that customers will go elsewhere if they don't. As a result, they end up giving credit terms, even without the proper safeguards, due to the lack of transparency and guardrails in the industry, leaving them vulnerable to non-payment.
Are certain sectors of the cannabis industry more affected by non-payment issues?
Retailers are particularly notorious for non-payment, which triggers a cycle of financial strain across the industry. When retailers fail to pay, it impacts producers and brands, who, in turn, delay payments to their testing-lab vendors.
On the other hand, some larger ancillary companies, such as grow-supply and lighting companies, are more stringent. They’ve been in business longer and are less likely to extend credit without proper precautions.
What best practices do you recommend for managing accounts receivable, aside from cash on delivery?
Firstly, appoint someone responsible for cash collection and establish a clear policy and procedure for this process.
It’s crucial to have a method for evaluating a company’s creditworthiness before extending credit. Ensure you have an onboarding agreement reviewed by a lawyer that includes default language for non-payment. If you’re offering substantial credit, securing a personal guarantee is the best way to protect yourself.
With many retail chains facing financial difficulties, vendors are often fortunate to recover anything at all, making these practices even more vital.
Why aren’t cannabis operators reporting default accounts to collections?
Many of my clients hesitate to submit outstanding accounts to collections because they’re concerned about their reputation. They don’t want to be perceived as aggressive or difficult within the industry. However, this mindset needs to change.
If a company isn’t honoring their payment agreement, they are the ones at fault, not you. Non-payment can lead to serious consequences, including business closures and personal financial losses.
What do you wish cannabis operators knew?
There’s a significant risk in using Facebook or WhatsApp groups to expose delinquent companies. While the intent may be to protect the community, these groups can inadvertently violate antitrust laws. If a sophisticated debtor on such a list sees posts advising others not to sell to them, it could lead to serious legal trouble.
The industry must recognize that while it’s important to share information, it must be done in a regulated and lawful manner.
The Impact of Financial Strain on the Broader Cannabis Supply Chain
The financial burden resulting from nonpayment impacts not only specific businesses but also the whole cannabis supply chain. Payment delays or defaults by retailers have a knock-on effect on manufacturers, brands, and service providers, resulting in a vicious circle of unstable economic conditions.
Due to their often narrow profit margins, producers and brands mostly depend on prompt payments to meet their running expenditures, which include debt repayment, salaries, and manufacturing costs. These companies are compelled to postpone paying upstream vendors, such as testing laboratories and packaging suppliers when they don't get payments from retailers on schedule. Due to the cascading effect of this delay, even companies with sound financial processes may find it difficult to fulfill their commitments, which might cause more supply chain disruptions.
Financial volatility is especially harmful to small enterprises, which may lack the reserves to absorb late payments. For them, a few missing payments from a large store might be the difference between survival and failure. This pressure frequently results in a tightening of loan conditions across the board, with suppliers being less willing to issue credit without severe protections.
Consequently, a contraction in financing may hinder the industry's ability to innovate and thrive. Uncertainty about their financial situation may make companies less inclined to invest in new items or take risks. Additional obstacles to growing a business in the cannabis sector include the general lack of market liquidity, which can make it hard for companies to expand.
Nonpayment problems thus represent more than isolated occurrences; rather, they point to more widespread financial weaknesses in the cannabis industry. To overcome these obstacles, the industry as a whole must adapt structurally to improve the availability of credit and capital as well as improve corporate financial management procedures.
Bottom Line
Nonpayment is a significant challenge that threatens the sustainability of cannabis companies, particularly in newer markets like Michigan. The ripple effect of financial strain extends beyond individual businesses, impacting the entire supply chain and stifling growth and innovation in the industry. To mitigate these risks, cannabis companies must adopt stringent financial management practices and the industry must advocate for systemic changes that improve access to credit and capital. Only by addressing these underlying financial vulnerabilities can the cannabis industry build a more stable and resilient future.
NOT PAYING BILLS IN THE WEED GAME IS COMMON, READ ON...
DISPENSARY OWNER BRAGGING ONLINE ABOUT NOT PAYING HIS BILLS!
