The Vicious Cycle of Nonpayment in the Green Industry: How to Avoid Becoming Another Statistic

In a recent article by Cannabis.net, "The #1 Reason Marijuana Companies Fail Is…," the primary cause of failure for marijuana companies is a lack of payment. While high taxes, 280E rules, and limited banking access pose significant challenges, the reality is that many cannabis companies are getting crushed under the weight of unpaid invoices. As Brett Gelfand of Cannabiz Collects pointed out, newer markets like Michigan are seeing an alarming rise in delinquent payments, threatening to destabilize the entire industry.

You might think your business is immune to these problems, but the truth is, nonpayment issues can hit anyone, especially in markets that are still finding their footing. This isn’t just about a few late checks—it’s a systemic issue that can cascade through the entire supply chain, leaving businesses high and dry.

The Domino Effect: Why One Missed Payment Can Lead to Collapse

Nonpayment doesn’t just hurt the business that’s owed money; it ripples out to impact everyone involved. When retailers fail to pay up, it puts immense pressure on producers, brands, and service providers, who then struggle to meet their own financial obligations. Before you know it, you’ve got a whole chain of businesses on the brink of collapse, simply because one link in the chain broke.

In Michigan, for example, unpaid debts in the regulated adult-use market have grown so large that the state is now rivaling California in this dubious distinction. According to Whitney Economics, delinquent payments in the U.S. cannabis industry could exceed $4 billion in 2024 alone. That’s $4 billion in unpaid bills that could have kept businesses afloat, paid employees, and fueled growth and innovation.

Why Are So Many Cannabis Companies Failing to Pay?

The root of the problem lies in the unique financial challenges faced by the cannabis industry. Unlike other businesses, cannabis companies cannot access traditional banking services. They can’t just swipe a credit card or take out a loan to cover a temporary cash flow issue. Instead, many are forced to rely on trade credit—essentially, taking goods or services on credit and promising to pay later. But without the safeguards that traditional lenders have, like credit checks and personal guarantees, cannabis businesses are essentially flying blind.

Retailers, in particular, are notorious for nonpayment, setting off a domino effect that reverberates through the entire supply chain. Meanwhile, ancillary companies, such as those providing grow supplies or lighting, are less likely to extend credit without proper precautions, simply because they’ve been around longer and have learned the hard way.

How to Break the Cycle: Best Practices for Managing Accounts Receivable

So, how can your business avoid getting caught in this trap? Here are some best practices to consider:

1. Assign Responsibility: Designate a team member to be in charge of cash collection and ensure they have a clear policy to follow.
2. Assess Creditworthiness: Before extending credit, thoroughly evaluate the financial health of the company you’re dealing with. This could include credit checks, references, and reviewing financial statements.
3. Legal Safeguards: Make sure your onboarding agreements include clear terms for nonpayment, reviewed by a lawyer. Consider securing a personal guarantee for larger sums of credit.
4. Use Collection Services: Don’t be afraid to turn to collections if necessary. Many cannabis operators hesitate, fearing damage to their reputation, but protecting your business should always be your top priority.

The Bigger Picture: Financial Strain on the Cannabis Supply Chain

The financial strain caused by nonpayment doesn’t just hurt individual businesses—it weakens the entire industry. When payments are delayed or defaulted on, it forces producers and brands to delay their payments to upstream vendors like testing labs and packaging suppliers. This creates a vicious cycle of instability that can make even the most financially sound companies vulnerable.

Small businesses, in particular, are at risk. Without the reserves to absorb late payments, they could easily find themselves facing bankruptcy. The result? A tightening of credit conditions across the board, stifling innovation and making it even harder for the cannabis industry to grow.

Bottom Line: The Need for Structural Change

To build a more resilient cannabis industry, we need more than just individual businesses adopting better financial practices—we need systemic change. This includes improved access to credit and capital, as well as industry-wide standards for financial management. Only by addressing these underlying vulnerabilities can we hope to create a stable, thriving cannabis industry.

Nonpayment is a significant challenge that threatens the sustainability of cannabis companies, particularly in newer markets like Michigan. But with the right precautions and a proactive approach to managing accounts receivable, your business can avoid becoming just another statistic.

For more insights on how to navigate the financial challenges of the green industry, stay tuned to our blog. After all, in this industry, keeping your cash flow healthy is the only way to ensure your business keeps growing.

Credit: Portions of this article were adapted from "The #1 Reason Marijuana Companies Fail Is…" originally published on Cannabis.net by Lemon Knowles.