Cannabis Industry Struggles with Nonpayment Epidemic: Expert Insights
The regulated cannabis industry in the United States is grappling with a growing problem: nonpayment. According to Brett Gelfand, managing partner at Cannabiz Collects, Michigan is becoming one of the worst states for unpaid invoices, rivaling California. In fact, delinquent payments in the industry are expected to surpass $4 billion in 2024, as reported by Whitney Economics.
What’s Driving Nonpayment in the Cannabis Industry?
Gelfand attributes the main factor leading to nonpayment to banking and capital access issues. Without access to traditional credit and capital, cannabis companies are forced to extend trade credit, acting like banks without formal training. This lack of transparency and guardrails around credit terms has created a free-for-all, where companies feel pressured to extend credit to secure sales, leaving them vulnerable to nonpayment.
Which Sectors are Most Affected?
Retailers are the most notorious for nonpayment, starting a cycle of debt that impacts producers, brands, and testing-lab vendors. Larger ancillary companies, such as grow-supply and lighting companies, are more cautious in their credit extension, having learned from experience.
Best Practices for Accounts Receivable
To mitigate nonpayment risks, Gelfand recommends the following best practices:
- Appoint a dedicated person responsible for collecting cash.
- Establish a written policy and procedure for accounts receivable.
- Analyze a company’s creditworthiness before extending credit.
- Use onboarding agreements with default language and personal guarantees.
- Consider cash on delivery or other secure payment terms.
Breaking the Cycle of Debt
Gelfand emphasizes the need for cannabis operators to report default accounts to collections, rather than fearing reputational damage. By holding companies accountable for their debts, the industry can break the cycle of debt and promote a culture of responsible business practices.
By implementing these best practices and promoting transparency around credit terms, the cannabis industry can reduce the risk of nonpayment and create a more sustainable and responsible business environment.
