Past-due cannabis invoices expose a growing credit discipline gap

This is part of a regular series of MJBiz Daily interviews with major THC industry players. To be considered for an interview, contact editorial@mjbizdaily.com.

In 2015, Brett Gelfand was just another entrepreneur hustling to carve out a place in Colorado’s buzzy, rapidly growing cannabis industry.

Through running a vertically integrated cannabis company, with a 45,000-square-foot grow, a manufacturing facility and two retail stores on the state’s Western Slope, he learned firsthand how difficult it is to know whether a wholesale buyer would eventually pay.

“We were selling blind,” Gelfand said.

“We’d extend credit terms to our customers, but we had no idea who was credible enough to take product up front and pay us in 30 days.”

The company had no formal credit process and no way to check credit. With collecting cash a major issue, Gelfand was inspired to build CannaBIZ Collects, a cannabis-focused collections agency.

Is the cannabis industry finally building credit discipline?

Through St. Petersburg, Florida-based CannaBIZ Collects, Gelfand helped fellow operators recoup what they were owed. As the business grew, nearly every client asked one question: How do we make sure this never happens again?

That question pushed Gelfand back to the drawing board, leading him to launch Cannabiz Credit Association (CCA), the industry’s first dedicated credit bureau and trade intelligence platform.

“We went from building a collection agency to spending the last two-and-a-half years working on credit management and credit scoring to prevent issues before they happen,” Gelfand said.

“Most cannabis companies don’t have a buttoned-up credit collection department. Many use their sales reps to decide who gets sales terms, and they also end up collecting the money.”

Since their inception, Gelfand’s companies claim to have helped catalog more than $2.6 billion in accounts receivable data provided by its 220 members, which include over 75% of the largest multistate operators.

“Everyone in cannabis has seen a collections issue. The data proves it’s not isolated – it’s everywhere,” Gelfand said.

And the data paints a bleak picture.

More than 56% of cannabis invoices across the country are past due, according to CCA. Even more worrying is that nearly 23.2% of invoices are more than 90 days overdue.

Last year, about $60 million in invoices ended up in collections.

Has cannabis outgrown handshake credit?

Many operators still hand out net terms to new customers with little more process than a gut feeling or a relationship. That often leaves sales reps – rather than trained credit managers – responsible for extending terms and collecting late payments, Gelfand said.

“If you’re extending credit terms, you’re acting like a bank,” he said. “A bank would never give a company that’s looking for money funding on a handshake.”

And unlike banks, most companies don’t have a playbook for checking credit. They’re also not charging interest.

Gelfand said businesses should have written agreements that spell out interest charges, legal fees or who picks up the cost of collections if things go south.

The roots of the problem go back to how state-by-state cannabis markets grew up fast without replicating mature finance systems. As businesses rushed from the illicit market into regulated channels, many simply kept doing business the way they always had – trusting that relationships would be enough.

But now, with so much product moving on credit and cash flows pinched, that approach is cracking.

What does risk screening look like?

Regulators are starting to pay attention. In Massachusetts, Gov. Maura Healey signed a bill in April that blocks buyers from new purchases if they’re more than 60 days late on past invoices “except upon full payment made on or before delivery by certified funds.”

But Gelfand said regulations aren’t the problem. By continuing to sell on trust, operators are not being responsible with their cash flow, he said.

However, the industry is shifting. More operators are starting to think like finance executives, adopting credit checks, risk scoring and written policies.

CCA provides its members with tools that allow them to pull credit reports, review payment histories, verify license data and spot warning signs before deals are inked – all steps that help avoid ending up in collections later.

With more than half of cannabis invoices being paid late, informal blacklists and Facebook warnings have popped up as operators try to protect themselves from nonpayment.

Gelfand warns against placing too much stock into blacklists and Facebook groups, citing legal exposure such as antitrust violations, tortious interference and defamation liability.

“We’re not just showing bad players,” Gelfand said. “We’re trying to make sure we’re giving visibility into behavior – good or bad – to make an educated decision on who you want to do business with.”

Brett Gelfand will lead a roundtable discussion on credit and collections best practices at MJBizCon Dec. 1-4 at the Las Vegas Convention Center.

Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.