Navigating the Cannabis Industry's Collection Crisis in 2023: A Roadmap Forward
By Brett Gelfand
The cannabis industry has witnessed exponential growth in recent years, leading to unprecedented opportunities for businesses and investors alike. However, this rapid expansion has also brought about unique challenges, and one of the most pressing concerns for cannabis companies in 2023 is the looming collection crisis. In recent years, unpaid invoices in the cannabis industry have almost become ‘the new normal’ and at the same time, new innovative solutions and strategies are emerging to address the challenges cannabis companies face in managing their credit and collections processes.
The Collection Crisis: A multifaceted challenge
1. Poor credit management and collection processes: Many cannabis companies have historically struggled with poor credit management and collection processes. This has been primarily due to the industry's unique legal and regulatory landscape, which can vary significantly from one location to another. As a result, businesses have faced difficulties in defining and enforcing standardized credit policies and collection procedures. SOPs might not be in place, and A/R often ends up in either the sales team or the CEO’s desk. This ultimately means that these past-due accounts are being pursued by the ones that should be selling and bringing new money, or that this issue stays unattended until it is almost too late to do something about it and there is little to no money left to collect.
2. Market conditions: The cannabis market is highly dynamic, with shifts in supply and demand impacting cash flows and profitability. This volatility can make it challenging for companies to predict revenue streams accurately, further exacerbating credit and collection issues. The fact that there are no federal cannabis laws to balance and push companies to abide by better business practices and that each cannabis company is left to deal with the different cannabis state laws which makes these cannabis market conditions even harder.
3. Heavy tax liability on cannabis companies: Cannabis companies face exceptionally high tax rates, which can consume a significant portion of their revenue. This heavy tax burden places immense pressure on their cash flows, making it difficult to meet financial obligations and pay off existing debts. This, as in the case of cannabis federal and state laws, is poorly managed and depends on every state, which ultimately leads to an unfair playing game when it comes to taxing and enforcing these laws.
4. Lack of data for proper underwriting: One crucial component of effective credit management is underwriting, which involves assessing the creditworthiness of potential clients. The cannabis industry has historically lacked access to comprehensive and accurate data, making it challenging -if not impossible- to conduct proper underwriting and risk assessment.
A Shifting Landscape: Towards stricter credit and collection protocols
In response to the collection crisis, cannabis companies are beginning to adopt stricter credit and collection protocols. This change is driven by the realization that traditional, less structured approaches no longer suffice in this rapidly evolving industry.
Stirring away from what early companies would call ‘the traditional way of solving this issue’ and undergoing better commercial business practices, new (and old) cannabis companies are starting to mimic commercial industry financial practices such as extending shorter net credit terms for first time buyers, signing contracts, getting paid percentages in advance before delivering their service or product, etc.
We are even starting to see stronger and more organized in-house first-party A/R teams that solely deal with invoicing and payments.
Emerging platforms
Cannabiz Credit Association (CCA)
Innovative solutions are also starting to be created to fill up the gap between companies and the lack of cannabis credit data. The CCA provides a centralized platform for sharing credit and financial information within the industry, allowing businesses to gain insights into potential client's financial health and reduce the risk of non-payment.
CannaBIZ Collects (CBC)
CannaBIZ Collects was founded in 2017 to serve a much-needed challenge. As the nation’s first and leading cannabis collection agency, it stands to address the collection crisis the industry has been facing. With over 900 clients, 30+ years of commercial collection experience, and over 6 years in the cannabis world, this debt collection agency’s main goal is to collect unpaid accounts as quickly and efficiently as possible on a contingency basis.
What about the SAFE Banking Act?
The SAFE Banking Act, and as of 2023 the Secure and Fair Enforcement Regulation (SAFER) Banking Act, which has been gaining momentum in recent years, aims to provide qualified cannabis companies with access to traditional banking services. It would ensure that all businesses—including State-sanctioned cannabis businesses—have access to deposit accounts, insurance, and other financial services. The legislation also creates common-sense standards for banks and credit unions to maintain customer relationships and to expand access to deposit accounts for underbanked groups.
However, this would require better insight and underwriting from banks before extending credit to these businesses. To comply with the Act, companies will need to demonstrate strong financial discipline and stability, encouraging a more rigorous approach to credit management.
Currently, the lingering conflict between cannabis Federal and State laws has left almost all financial institutions reluctant to conduct business with legitimate, State-sanctioned entities.
Consequently, these businesses, along with their employees, face obstacles when trying to access deposit accounts, secure lines of credit, and other financial services. This includes the ability to obtain mortgages, as well as the acceptance of credit and debit cards when conducting retail operations.
What’s next? Charting a Course Forward
The cannabis industry's collection crisis in 2023 is a complex challenge, but it's not insurmountable. By recognizing the root causes of poor credit management, addressing market volatility, managing tax liability, and investing in data-driven underwriting, cannabis companies can navigate this collection crisis successfully.
The emergence of platforms like the CCA and the potential passage of the SAFER Banking Act represent positive steps toward creating a more robust and sustainable financial ecosystem for cannabis businesses. As the industry matures, a proactive and strategic approach to credit and collections will be essential to ensure its long-term success. By embracing these changes and adopting best practices, cannabis companies can position themselves for a prosperous future in this dynamic and evolving landscape.
About Author: Brett Gelfand
Brett is an accomplished entrepreneur in the cannabis industry, with a talent for building successful brands and businesses. His career began in 2015 as CEO of a vertically integrated cannabis company in Colorado, where he gained extensive knowledge of the industry.
Later, Brett co-founded, PAQcase, a specialty child-resistant cannabis packaging business and served as CEO, successfully developing innovative packaging solutions that established the company as a leader in the space. His leadership and strategic vision were instrumental in achieving a successful exit in 2022.
Currently, as Managing Partner of CannaBIZ Collects, the nation’s first and leading cannabis collection agency, Brett leverages his expertise to help cannabis businesses navigate the complex legal and financial landscape related to credit and collections.
With a BBA in Finance from The University of Georgia, Brett brings a unique blend of business acumen and financial expertise to his work. Passionate about driving innovation in the industry, Brett continues to explore new opportunities and mentor aspiring entrepreneurs from his home base in St. Petersburg, FL.