The U.S. cannabis industry is grappling with a staggering $3.8 billion in delinquent payments, which poses an existential threat to many businesses in the sector, according to a new report from Whitney Economics.
The report, released Tuesday, revealed that the total amount of overdue payments equates to approximately 1.6 months of revenue for the entire industry. Many cannabis companies find themselves operating for an entire year with only about 10 months of actual cash flow, making it challenging to stay afloat.
“If payments are delayed for one business, it can create a ripple effect throughout the supply chain, especially a supply chain that already operates on razor thin margins,” the firm said.
Ripple effect
According to the study, cannabis cultivation companies are the most severely impacted by late payments. Large corporations and multistate operators account for a significant portion, $1.4 billion, of the delinquent payments.
The research also points out that retail dispensaries wield considerable power and are more likely to be late payers, while cultivators and small businesses bear the brunt of the consequences when payments are delayed.
“This is disproportionately impacting smaller and minority-owned businesses and in many cases is resulting in forced market consolidation and individual wealth destruction,” the report said.
Whitney said that delinquencies greater than 45 days account for 56.3% of the total delinquencies.
According to respondent data, wholesale and distribution companies are stuck in the middle, getting squeezed by late payments on both sides. They often don’t pay growers until retailers pay them. Slim margins and expensive quick loans make this juggling act even harder.
“Our lingering Accounts Payable is a direct result of our open Accounts Receivable,” one distributor said. “We pay obscene interest rates on capital to fund our customers’ inventory and expansion.”
Some distributors work on consignment, meaning they only pay suppliers after the product sells. That motivates them to delay payments as long as possible to avoid tying up their cash in inventory.
Meanwhile, processors are trying to collect from retailers and distributors.
“Receivables are probably the biggest challenge we face,” a respondent said. “The combination of few retailers having lines of credit to buy inventory coupled with the high cost of labor for on-site cash pickups (especially when payment isn’t ready) makes for a ‘perfect storm’ in the receivable’s world.”
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