The cannabis industry, despite its rapid growth and economic potential, continues to face multiple financial crises that threaten its viability. Among the most deleterious and broadly experienced challenges lives the ugly beast known as: aging accounts receivable (AR). As will ring true for most industry stakeholders; operators struggle to collect payments in a timely manner, leading to a domino effect of financial distress that extends to vendors, suppliers, and ultimately the entire supply chain. In the absence of immediate and persistent reconciliation efforts, these cash flow constraints stifle growth, hinder innovation, and in many cases, force businesses to fallow operations or close their doors entirely.
The Ripple Effect of Aging AR
Aging AR occurs when outstanding invoices remain unpaid for extended periods, exceeding the agreed upon terms for remittance, tying up crucial working capital. In the cannabis sector, where traditional banking access is limited due to persistent federal illegality alongside elevated state/federal tax rates, the AR problem is exponentially exacerbated. When operators experience delays in payment, they in turn cannot pay their own suppliers. This creates a chain reaction where vendors struggle to maintain inventory, invest in new products, or even consistently satisfy revenue-generating payroll obligations. While easily documented in legacy cannabis markets along the west coast, even robust adult-use markets are highly likely to experience this liability for a majority of licensed operators and ancillary service providers. The recent trends in cannabis asset default/receivership continues to worsen this trend in that newly controlling entities only commit to reconciling the most recent open invoices leaving older AR a responsibility of the previous leadership. Typically, previously leadership has walked away from the obligations which persist in the absence of legal protections commonly leveraged by noncannabis business models.
The consequences are significant:
1. Supply Chain Disruptions – Vendors unable to receive payments halt shipments, leading to stock shortages and declining sales for retailers. Operators are unable to cover existing consumable purchases, halting new consumables in hand to continue revenue generating outcomes for producers.
2. Increased Costs – Late payments typically force businesses to seek bridge loans or alternative financing methods, adding financial strain. The recent trend of borrowing against external AR with a cash loan for the impacted operator has offered some relief, but it merely presents as a short-term solution and consistently falls into the category of ‘high-interest capital’.
3. Creditworthiness Damage – Operators and suppliers with aging balances face a weakened credit profile, making future transactional relationships with lenders and operators substantially much more difficult to navigate.
4. Legal Risks – Persistent non-payment issues could result in legal disputes, further draining resources. Although disputes are increasingly more common, documented legal precedent is very hollow with respect to mechanisms of enforcement within the nascent cannabis industry. Something as common as a bankruptcy filing is generally not an established option for licensed cannabis businesses.
Exploring Solutions:
Mutual Invoice Swaps To combat the challenges of aging AR, the cannabis industry must explore innovative financial solutions. One such remedy is invoice swapping, a practice where two companies within the same regulated market that have mutual outstanding AR offset their invoices, effectively reducing the need for full cash remittance.
How Invoice Swaps Work:
- Two businesses (debtor and debtee) with open AR agree to trade outstanding invoices for products and/or services of equivalent cash value.
- Instead of waiting for external payments, they settle debts internally, improving potential cash flow for the debtor while maintaining a more cooperative and tangible financial outcome from the debtee.
- This practice minimizes reliance on expensive credit solutions and reduces the risk of default for the debtor with value offsets eligible to further support cash flow.
Sales and Collections Management Platform Launch
The Missouri market is welcoming a robust services model option designed to execute both highvelocity sales transactions and AR collections services for all licensed cannabis operators. Square Wave is a newly minted services platform specifically designed to manage sales transactions of bulk material and finished goods alongside collections support for enrolled stakeholders. Square Wave manages holistic buy/sell and collections-oriented relationships for the entire Missouri market landscape and is launching with the first month of service at no cost. The value add both simplifies a producers’ relationship with the ever-changing operator landscape while tirelessly working to enforce timely payments that meet or beat agreed upon payment terms. For more information, simply email: info@square-wave.co.
Final Thoughts
As the cannabis industry matures, mitigating the problem of aging AR is critical to sustaining both immediate and long-term business viability. Operators, vendors, and financial institutions must collaborate on innovative service solutions that promote liquidity and collective financial well-being for all stakeholders. Without intervention, the cascading effect of unpaid invoices will slow the industry's momentum and hinder the progress of businesses that have worked tirelessly to establish themselves in an ever-evolving marketplace.
About: Avail Ag provides specialized services to the cannabis, CBD and psychedelic industries with a constant focus on enhancing their growth and sustainability. Avail offers strategic consulting and capital-sourcing networks that foster regulated business successes with over $200M in cannabis deals financed in the past 3 years. The holistic service model is underpinned by extensive expertise in operational, financial and accounting disciplines. For more information, visit availproserve.com