Member Blog: The Credit Application

by Sam Fensterstock, AG Adjustments

Granting credit has not yet become standard in the cannabis market, but as discussed in my article “Trade Credit in Cannabis,” published in the May issue of mg, I believe it will be in the future. Therefore, it is important that a company create a credit policy to define how it will manage its credit and collection processes and evaluate credit risk. Once that is accomplished, the next, and most important, step is to develop a credit application.

Why do you need a credit application?

A credit application provides basic information about a customer’s business and offers measures of protection that will increase the ultimate collectability of an account if the customer doesn’t pay. Companies in the cannabis market may aid their collection efforts by requiring all customers, even those that are on cash terms, fill out a credit application. I cannot emphasize enough how many times my firm, AG Adjustments (AGA), has been successful in recovering a client’s past-due monies because the clients took a proactive approach and obtained a well-drawn-up credit application.

The credit application is one of the primary tools available for protecting a company and controlling credit risk when extending trade credit to customers. Remember, taking a check from a customer is a form of credit. Even customers who are paying cash on delivery should fill out a credit application.

What is a credit application?

A credit application is a contract between seller and buyer. A good credit application will benefit the seller; a bad one, the buyer. Therefore, it is important to be certain the credit application, whether electronic or on paper, contains all the safeguards and guarantees available to reduce risk.

Securing a credit application does not guarantee payment, but it is one of the more significant documents to assist in making good credit decisions and ultimately collecting past-due accounts receivable and associated collection fees. The adage “the sale is not complete until the money is in the bank” is as true today as ever. A good credit application will assist in getting money into the bank.

What do companies selling into the cannabis market need to know to control credit risk?

A credit application is the first step in gathering information about potential customers. Even if customers pay in cash, the day will come when that system changes, and getting information about accounts at the start of business relationship is key. The more you know about its debtors, the better. In addition, collecting credit information will make it easier to determine exactly how much credit to extend a customer.

Never assume all information on the application is correct. Verify the information provided before granting credit. The sales department must make sure every customer fills out and signs a credit application prior to delivery of any goods or services, even if the customer is paying C.O.D.

A credit application serves two purposes: It is a data-gathering tool and a contract. As a contract, it specifies the rights and obligations of both the customer and the creditor. The application should be written in a way that provides the creditor an advantage if business relationship with the client falters. As the saying goes, “Credit is not a right but a privilege.”

Verifying the credit application

The first thing to do once an application is obtain a commercial credit report from a leading credit bureau such as Dun & Bradstreet or Experian. Many prospective customers may not have a lengthy credit history, but that will change as the cannabis industry moves forward. Contact at least three trade-credit references, as well as the applicant’s bank, to verify the existence of accounts. Be sure all references are legitimate, or at least exist if one or more are difficult to contact. Any false information on the credit application is a strong indicator the potential customer may not be reliable. If the buyer is looking for a substantial credit line, review their financials, especially a statement of cash flow. If the applicant is operating in a negative cash position, ensure they will have enough cash available to pay their debt. Limit their credit line or, at the very least, modify payment terms if it seems an applicant may have a cash flow problem.

After credit is extended

Periodic credit reviews are a necessity. Account defaults arise with existing long-term customers as well as new ones. Customer credit limits should be reviewed periodically—at minimum, once a year. Obtaining current credit bureau reports about the largest customers annually is a good idea. Stay on top of aging accounts receivable. If a customer is always sixty to ninety days past-due on part of their balance, they are only one period away from becoming a problem.

When trade credit becomes the norm in the cannabis industry, asking a new customer to fill out a credit application will become standard practice. Currently, this is not the case in the cannabis industry; nevertheless, AGA recommends companies operating in the market implement sound credit policies and processes now in order to prepare for the near future.

The read the full article published in MG Magazine click this link – https://mgretailer.com/the-credit-application/

Sam Fensterstock is the SVP of Business Development at AG Adjustments, a leading provider of 3rd party commercial collection services and a member of the NCIA’s Finance & Insurance Committee. Sam has spent his entire business career as an entrepreneur and senior executive in the commercial credit & collection space. He has been a founder and played a key role in the dynamic growth of several leading niche commercial credit risk management companies and is considered an expert in the order to cash and credit and collection process. Prior to joining AG Adjustments, Sam was the Director of Business Development at PredictiveMetrics, a statistical based credit and collection scoring and modeling company that he helped grow and sell to SunGard (FIS) in 2011. Sam can be reached at samf@agaltd.com or 631-719-8096.

Photo Credit: Cafe Credit via Flickr, under the Creative Commons License

Member Blog: Trade Credit in the Cannabis Market – What You Need To Know To Create A Smart Trade Policy

By Sam Fensterstock, AG Adjustments Ltd.

*Editor’s note: This blog is an excerpt of a full article which appeared in MG Magazine.

We attended the MJBIZ show in Las Vegas last fall and were fortunate to speak with many companies that operate in virtually every aspect of the emerging cannabis market. The one thing they all hoped for, and felt confident would happen, is that the banking system will become available to the industry sooner rather than later. When that happens, business in the cannabis market is going to change dramatically. Access to the banking system means access to trade credit. When trade credit becomes available to growers, manufacturers, wholesalers, distributors, and retailers serving the cannabis market, things are going to change. At every level, the industry is going to have to learn how to provide and deal with managing trade credit and its inherent risk.

What is trade credit?

Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. The system commonly is used by business organizations as a source of short-term financing. It is granted to customers who have a reasonable amount of financial standing and goodwill.

Many of the growers and manufacturers we spoke to at the conference, specifically those operating in the Colorado market, already have bank accounts and are extending limited amounts of credit. They accept checks (a form of credit) from their customers, and in many instances, they give customers up to fifteen days to pay their bill. These companies and cannabis entrepreneurs all agree: as the cannabis market matures, the business is going to change. In fact, whether you recognize it or not, you already use some type of trade credit to operate. Your rent is due monthly, your utilities are due monthly, etc. You are extended credit on a limited basis to operate and grow your business.

More and more states are passing laws legalizing medical and recreational cannabis use, and companies entering the industry are going to want to access the credit markets and use this money to fuel their expansion. A true trade credit system, at every level of the industry, will need to come into existence. Mainstream corporate America operates in this environment and the cannabis industry will as well. It’s just a matter of time. The financial underpinning that guides the nascent cannabis market today must develop to meet the industry’s growth needs. The way cannabis companies transact business is going to change, for the positive, and trade credit will fuel its growth.

coins-in-hand-1559x893 Federal regulations force most companies operating in the cannabis space today to deal primarily in cash. If you look back at emerging industries, operating only in cash doesn’t foster an environment for growth. Think of it this way: in a cash environment, a company with $1,000 in cash can buy only $1,000 worth of goods, but in a trade credit environment, a company with $1,000 in cash and $2,000 in trade credit can buy $3,000 worth of goods. Potential income from retail sales has tripled.

So, for the cannabis market to grow, it cannot be a cash-only business. Without a doubt, the banking industry is on the side of the cannabis industry. Banks do not make money from cash businesses. They want a part of the billion-dollar cannabis market, and they will exert formidable pressure on federal lawmakers to reclassify marijuana as a legal substance, at least under medical supervision. Currently, nearly 300 banks offer services to cannabis-based businesses, but eventually the entire banking industry—more than 5,000 commercial U.S. banks—will join them. The question is, what must businesses do to implement a trade-credit model that fosters sustainable growth? It is imperative that companies understand how to create and implement smart trade credit policies.

Companies that operate in the cannabis industry will migrate toward a trade credit environment in which a grower grants credit—with terms specifying three days to thirty or more days—to the manufacturer, wholesaler, or distributor, who then grants credit to the downstream entity that sells its products to dispensaries, who retail the products to consumers. Or, a grower might grant credit directly to a retailer. Growers, in turn, will be extended credit by their suppliers: lighting companies, soil providers, packaging providers, etc. Once a company extends credit, it will need to manage accounts receivable.

In conclusion

Once federal banking regulations change and companies serving the cannabis market gain the same financial resources available to the rest of corporate America, entrepreneurs will need to implement formal credit policies that allow them to manage and grow revenue in a trade credit environment. Establishing the controls necessary to operate when credit and accounts receivable are commonplace will set companies on the road to even greater profitability.

To read the full article as published in MG Magazine click here – https://mgretailer.com/trade-credit-in-the-cannabis-market/

Sam Fensterstock is the SVP of Business Development at AG Adjustments, a leading provider of 3^rd party commercial collection services. Sam has spent his entire business career as an entrepreneur and senior executive in the commercial credit & collection space. He has been a founder and played a key role in the dynamic growth of several leading niche commercial credit risk management companies and is considered an expert in the order to cash and credit and collection process. Prior to joining AG Adjustments, Sam was the Director of Business Development at PredictiveMetrics, a statistical based credit and collection scoring and modeling company that he helped grow and sell to SunGard (FIS) in 2011. Sam can be reached at samf@agaltd.com or 631-719-8096.