The majority of B2B wholesale cannabis businesses in California are represented by a group of distributors and brands that have engaged a credit association to evaluate stores to reduce hundreds of millions of dollars in arrears and deter repeat offenders.
the Credit Management Association (CMA)Inc., a nonprofit organization headquartered in suburban Los Angeles, reviews invoices and other paperwork from more than a dozen distributors and companies.
A “Don’t Sell” list of 25 California stores that don’t pay their bills on time will be sent to both sellers and brands by the CMA, indicating a seismic problem in the largest cannabis market in the country and in the world.
According to group members, the list of companies includes merchants and delivery services that are often in arrears and owe at least $25,000 in product debt.
Likely all retailers and delivery services in the state (including those not listed) They owe more than $1 million in unpaid bills Because companies classified as “do not sell” jointly owe at least $625,000.
This issue is more complex than it first appears, similar to most issues in the cannabis business. For many years, it was difficult for stores and delivery services to turn a profit due to high taxes, regulations, and competition from the black market.
Most stores do not deliberately seek to act bad or bad. According to industry insiders, many are struggling to pay off their debts and defaulting. A credit institution creates corporate credit reports by collecting data sets, onboarding new members, coordinating group meetings, and more.
According to Vince Ning, creator and co-CEO of California marijuana distributor Nabis, the San Francisco company that leads the accountability initiative, “The group’s goal is to create a more consistent framework and financial framework in the marijuana supply chain.”
According to Ning, Nabis distributes $400 million worth of merchandise annually, or more than 20% of the wholesale industry. It also runs the brands’ client groups, with Nabis keeping a portion of the money owed by the merchants as compensation for leading the campaign to collect the debt.
Brands are in a tough place
According to industry sources cited by MJBizDailyUnpaid bills have become a widespread problem for many brands, distributors and manufacturers in California. This deadlock has been an ongoing concern for years, but escalated dramatically in mid-2022 when industry stocks began to decline, and available capital became scarce.
Among the hardest hit are companies licensed for social equity and brands, including those owned by Black and Latino entrepreneurs. These individuals and institutions have been disproportionately affected due to their limited access to capital reserves and resources.
One of California’s best-selling pre-launch joint brands, Presidential Cannabis, a credit organization member, had a customer in the Inland Empire stop returning calls after accumulating $180,000 in unpaid payments.
Many brands that rely on merchants and delivery services to sell their goods are in a difficult situation. Due to difficulties, Black-owned Presidential in Los Angeles has changed its policy and now requires payment in full before opening. Before it closed its doors, another customer ordered $120,000 worth of merchandise.
The tough stance had affected sales of the presidency, which increased and tripled annual income before last year.
“Some of the brands of us have gone to great lengths to get our products into stores, doing anything they ask. We had to stop selling to many of our big customers because they weren’t paying,” said co-founder and CEO Everett Smith. “It didn’t seem appropriate or fair to just withdraw this order,” he continued. There are no investors with us. Every dollar counts.
credit struggle
Sunderstorm, the popular manufacturer of the Kanha gum brand, has faced challenges recovering unpaid debts and has turned to collection agencies as a last resort. However, the effectiveness of this approach has varied, with the 20% fee charged by most agencies resulting in losses for the business.
Based in the San Francisco Bay Area, Sunderstorm successfully recovered $15,000 in unpaid wages by suing the delivery operator but had to deduct a collection fee. Typically, cannabis companies cannot file small claims due to the court’s $5,000 limit, which is often exceeded by outstanding bills. To account for uncollected receivables, Sunderstorm sets aside $30,000 per month as a bad debt reserve.
Keith Seche, Co-Founder and President, highlighted the significant impact unpaid bills have on the industry. Non-payment by retailers and distributors creates a ripple effect, affecting extraction companies, packers and farmers who depend on timely payments. An industry consortium was formed to address these issues and ensure financial stability.
With the regulatory changes, distributors such as Nabis have cut losses by shifting the responsibility of collecting the 15% excise tax from distributors to retailers. Thanks to the measures in place and stricter credit controls, the outstanding balance now stands at a few hundred thousand dollars, according to Ning.
In the cannabis industry, credit rating is gaining importance, paralleling practices in traditional sectors such as banking, lending, and government. Fitch Ratings, Moody’s, and Standard & Poor’s, the major global credit rating agencies, have begun rating cannabis companies such as Canopy Growth Corp. , a landmark recognized by the California cannabis group CMA. The CMA sees the need to protect receivables and manage credit risk, and anticipates a mutually beneficial business relationship in this market where no other active business credit associations are currently operating.
Drawing from historical precedents
Regulations governing credit in the alcohol sales industry have been in place since the end of the Prohibition era. Under federal law, suppliers can extend credit to retailers for 30 days. Similarly, California and most states have their own credit laws on alcohol sales, imposing fines and possible license suspensions for suppliers and retailers who fail to comply with 30-day credit plans.
New York It could become one of the first states to introduce similar credit laws in the cannabis industry. Proposed rules in the state’s newly created adult use market would require operators to settle credit purchases within 90 days. Distributors must report any payment delays to the New York Office of Cannabis Administration, which has the power to void agreements.
In California and New York, licensed cannabis companies are mandated to purchase products from authorized distributors. To mitigate the credit challenges facing California’s cannabis industry, State Assemblyman Philip Ting, a San Francisco Democrat, is leading the charge with Assembly Bill 766. This legislation imposes significant penalties on operators who bypass credit agreements, addressing the problem where they often don’t. Companies receive payment for their services and have limited remedies. The bill states that licensees who accept goods and services worth at least $5,000 must settle invoices no later than 15 days after the due date. Failure to comply will result in a warning notice being issued by state regulators, who are empowered to issue citations and take disciplinary action.
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the Wholesale cannabis industry California is grappling with unpaid debts, prompting distributors and brands to team up with a credit association. The Credit Management Association (CMA) evaluates invoices and compiles a “Don’t Sell List” of stores with outstanding invoices. This situation highlights the need for credit assessment and regulatory changes to address the credit challenges facing the industry. Finding solutions to ensure timely payments and financial stability is paramount to all parties involved.
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