Addressing the Unspoken Challenge in Cannabis Banking Reform

As industry advocates and policymakers rally for the Safe Banking Act and broader banking reforms to support the burgeoning cannabis sector, there’s a critical issue we must confront – the perilous credit landscape within the industry itself. The “elephant in the room” is not just about banking access or the 280-E tax code but the alarming amount of receivables stretching the financial stability of the cannabis supply chain to its limits. Here’s the reality we’re facing:

Growers extend credit to processors (and dispensaries), processors to dispensaries, with many receivables extending well beyond the standard 30-day window. This has inadvertently built a fragile “house of cards” where the risk of collapse grows with each delayed payment. The industry’s foundation is built upon the products farmers grow and they are typically the last to receive payment.

Traditional due diligence and credit checks are often overlooked in the rush to secure deals. In other industries, lines of credit are backed by thorough financial vetting – but in the rush to capture market share in cannabis, these norms are frequently bypassed, heightening financial risk. With standardized credit practices nearly non-existent, and the usual financial instruments out of reach due to federal legislation, many cannabis businesses are forced into the arms of what can only be described as industry “loan sharks.” These entities or individuals often provide funds with exorbitant interest rates and harsh terms, putting businesses in a dangerous cycle of debt and vulnerability.

Despite living in a digital age, many transactions in the cannabis industry are still cash-based due to banking restrictions. This not only increases security risks but also inflates labor costs associated with handling, scheduling, and transporting cash. In a typical digital transaction environment, receivables are managed and monitored through electronic systems that track and expedite payments. However, in the cannabis industry’s predominantly cash-based system, receivables often go unpaid for extended periods.

The longer a receivable remains unpaid, the costlier it becomes for the creditor to carry it on their books. This is because carrying long-term receivables requires businesses to tie up capital that could otherwise be invested back into the company or used to settle their own debts. In addition to this opportunity cost, the labor and administrative overhead associated with tracking these receivables are significantly higher. There’s a continuous need for diligent cash flow management, manual follow-ups, and even legal costs to pursue delinquent accounts – all demanding resources that could be better used in company growth or innovation. These tasks, while crucial, divert human resources from core business activities, hampering productivity and adding to the bottom line without generating revenue.

The cannabis industry’s intensely competitive environment exacerbates the challenge of accountability. Companies are racing to establish their presence, secure market share, and innovate, often at the expense of fostering a culture of transparency and financial responsibility.

In the rush to outpace competitors, cannabis businesses may extend credit without proper due diligence, hoping to lock down a sale or establish a relationship with a new client. The pressure to make a deal now and worry about payment later has created an ecosystem where financial vetting takes a back seat to immediate growth, increasing the risk of default.

The relentless drive to be ahead often results in a lack of open communication between businesses. There’s a hesitancy to share information about bad actors or defaulting clients due to fear of appearing weak or vulnerable. This silence prevents the formation of a united front against poor credit practices, allowing problematic payment behaviors to continue unchecked. In such a fiercely competitive landscape, companies may fear that taking a hard stance on receivables might push customers to more lenient competitors. This reluctance undermines accountability, as businesses often give debtors more leeway than financially prudent. The result is an industry norm that tacitly condones delayed payments, creating a ripple effect that stresses the entire supply chain. The prioritization of short-term gains over long-term stability has left the industry without a unified approach to credit management, and when payments fall through, the lack of standard repercussions makes recovery efforts less certain and more arduous.

The bottom line is that banking reform is just one piece of the financial puzzle in the cannabis industry. To build a truly sustainable and robust sector, we must also establish standardized credit practices, ensure better financial accountability, and foster a culture of transparency. This isn’t just about creating a stable business environment; it’s about securing the future of the industry and protecting the investments and livelihoods of those who have pioneered this space against all odds.

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