The competition between Michigan and California in the cannabis industry extends beyond regulated recreational sales. Michigan's operators also rank high in terms of unpaid invoices, posing significant financial challenges within the market. According to Brett Gelfand, managing partner at Cannabiz Collects and founder of the Cannabiz Credit Association, Michigan is emerging as one of the most problematic states for unpaid debts in the regulated cannabis industry.
Gelfand noted that while Oregon and Colorado were previously significant markets for debt collection, many companies in those states have been "weeded out," leading to a decrease in collection activity. However, new markets like Michigan are increasingly contributing to the issue.
Whitney Economics, an Oregon-based cannabis data and research company, forecasts that delinquent payments in the U.S. cannabis industry could exceed $4 billion in 2024.
A primary factor contributing to unpaid invoices in the cannabis industry is the lack of access to traditional banking and capital. Unlike other businesses, cannabis operators often cannot obtain credit cards or standard operating capital. This forces them to rely on trade credit, effectively making them act as banks without the necessary expertise or safeguards.
When cannabis companies extend net-15 or net-30 terms, they take on the role of financial institutions but without the recourse available to banks, such as credit checks or liens. This puts them at a disadvantage, as they feel compelled to extend credit to secure sales, risking financial instability.
The retail sector is most notorious for nonpayment, triggering a domino effect across the supply chain. Retailers' unpaid debts affect producers and brands, which in turn delay payments to testing labs and other service providers. Larger ancillary companies, such as grow-supply and lighting businesses, are generally more cautious and less likely to extend credit freely due to their experience in the industry.
To mitigate financial risks, cannabis companies should implement several best practices:
Dedicated Collections Role: Assign someone responsible for collecting payments to ensure accountability and follow-through.
Clear Policies and Procedures: Document and enforce a comprehensive policy for managing accounts receivable.
Customer Analysis: Evaluate a company's creditworthiness before extending credit terms.
Onboarding Agreements: Use legally reviewed agreements with default clauses to protect against nonpayment.
Personal Guarantees: Secure personal guarantees for significant credit extensions to safeguard against default.
With many retail chains struggling financially, vendors are often left with little recovery, emphasizing the need for these protective measures.
Many cannabis operators hesitate to report default accounts to collections due to concerns about their reputation. They fear being perceived negatively in the industry. However, Gelfand argues that this mindset needs to change. Not fulfilling payment obligations can lead to severe consequences for other businesses, potentially causing them to fail.
Operators must also be cautious about informal reporting through Facebook or WhatsApp groups dedicated to exposing delinquent companies. While well-intentioned, these groups can violate antitrust laws, especially if they deter sales to specific businesses. It's crucial for industry participants to share information in a regulated manner to avoid legal repercussions.
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