Why is It So Hard to Get Paid in Cannabis?

Cannabis operators face a wide variety of complex issues ranging from compliance to fluctuating prices and over-saturation. But one problem is very straightforward: how to get people to pay you the money they owe you. 

The difficulty in receiving payment on debt is serious and can affect the solvency of a cannabis company. It is in many ways a sign of a young industry in which financial analysis, credit-awarding guidelines, and accounts receivable policies are not the norm. 

How big of a problem is debt collecting in cannabis?

“Debt collection is an issue that has probably directly or indirectly affected everybody that has ever sold wholesale product in cannabis. So that can be anyone from licensed producers to cultivators wholesaling products to other retailers. If you’re ever selling your product to another retailer then you're probably going to face a time when the retailer asks for credit terms,” Brett Gelfand told Rootwurks.

Gelfand is the Co-Founder and Managing Partner at the cannabis-focused collections agency CannaBiz Collects. 

Gelfand was previously the CEO of a cannabis company in Colorado, an experience that made it clear to him that cannabis has a collection problem. 

“Sales went through the roof but then nobody paid us on time,” Gelfand said, adding “no one knew how to establish a proper credit or collection policy.”

He said that in the cannabis industry, there isn’t enough financial analysis done before awarding credit. 

“The minute you extend credit you are acting as a bank and if you go to the bank and ask for a loan they're not just going to say sure we want your business they're going to want a lot of information from you.”

He added that “part of it is just unsophistication and being a young industry, a lot of people don't understand what it takes to build a collections and credit policy. The other is just that there's no data and no way to know who is a good or bad actor in the industry.” 

He said that companies typically award credit without drawing up contracts that include interest or other stipulations. 

How can cannabis companies make sure they get paid?

According to Gelfand, the most important step cannabis companies can take to make sure they get paid is to “put all your accounting team in one room and say we aren’t going to leave until we have a credit policy and a collections policy in place.” 

Other than that, Gelfand said cannabis companies should get an onboarding agreement with every new customer that addresses payment terms and what happens if they default on a debt. 

Gelfand pointed to the lack of accounts receivable data as the biggest issue facing cannabis companies in regard to collections. For the industry to get a handle on debt collecting, it must adopt an “all for one and one for all” scenario in which companies share their accounts receivable data.

“If people aren’t willing to share their data collaboratively like they do in most industries then everyone is going to be left evaluating their own decision-making and that’s difficult,” Gelfand said.  

Oversupply and the awarding of cannabis credit

“It’s like how people don't think they need insurance until they get hurt and then they realize they need you. That’s what's happening in cannabis right now,” Sam Fensterstock told Rootwurks.  

Fensterstock is the SVP of Business Development at AG Adjustments, a 3rd party commercial collection services company, and a member of the National Cannabis Industry Association’s Finance & Insurance Committee.

Fensterstock blamed the saturation of the wholesale cannabis market for the current state of debt collecting in cannabis. 

“Oversupply in cannabis meant that there was a glut of cannabis and it gave dispensaries the leverage to say if you don’t give me credit terms I’m just going to buy from somebody else.”

As Fensterstock explained, dispensaries can go to different cannabis wholesalers and seek out the ones with the most forgiving credit terms. Those wholesalers in turn don’t carry out proper financial analysis before awarding credit and can find themselves unable to collect from the companies that owe them. 

Fensterstock said that in most industries, the placement of the average collection is 90 days past due. In the cannabis industry, it's 300 days. He added that while his company’s average collection is $3,200 across all other industries, in cannabis, the average is $75,000 to $80,000.

Fensterstock described the problem as being centered on two major issues: cannabis companies don't know how to extend credit and do risk assessment, and they don’t have accounts receivable actions in place to make sure they get paid. 

“Cannabis companies have no background in credit risk analysis and how to make a credit decision,” Fensterstock said. 

Fensterstock said that ultimately, collecting debt in cannabis is no different than in other industries. He described it as a conversation in which you speak to the company and try to negotiate a solution before getting the lawyers involved. The situation he describes is much more carrot than stick, and something akin to being a hostage negotiator. He said that about 40% of the time when the threat of a lawsuit is made or a company is hit with a summons, they find a way to settle the debt. 

Coming together to solve unpaid invoices

In California in May, a group of cannabis companies formed a coalition to address the issue. Named Financial Stability for California Cannabis (FSCC) the group is looking for ways to tackle unpaid invoices throughout the cannabis supply chain at the same time that companies in the state are reeling from the effect of lower prices and oversupply. 

The group includes some of the biggest names in cannabis in California and represents about 45% of cannabis sales volume in the state. 

The group has thrown its weight behind California’s House Bill 766. Also known as “The Cannabis Credit Protection Act,” the bill looks to establish standards to regulate cannabis sales that are based on credit. 

Among other guidelines, the bill would require companies accepting goods and services worth $5,000 or more to pay their invoices within 15 days after the due date. It would also ban the purchase of goods from other operators on credit until the previous invoice is paid. 

The debt collection problem escalated in mid-2022 as the industry began suffering from a downtown, drying up capital and leading many companies to rely on credit.

According to Vince Ning, co-founder and co-CEO of Nabis, "collections and outstanding debt related to unpaid invoices are key challenges facing cannabis operators of all types across the state, from cultivators to manufacturers, vertical brands to wholesalers, and everyone in between.”