Service Solutions | 10.26.22 | Show Me the Money – The Current State of Cannabis Lending
NCIA’s Service Solutions series is our sponsored content webinar program which allows business owners the opportunity to learn more about premier products, services and industry solutions directly from our network of established suppliers, providers and thought leaders.
In this edition originally aired on Wednesday, October 26, 2022 we were joined by the experts from cannabis-focused financial institutions FundCanna, Safe Harbor Financial, and AVANA Companies to dive deep into the current state of cannabis lending with leading industry journalist John Schroyer of Green Market Report.
A decade after California and Colorado became the first adult use states, the regulated U.S. cannabis market encompasses over 70,000 cannabis-related businesses. Shockingly, most of those businesses still lack easy access to debt and other forms of growth and operating capital. From federal prohibitions and the impact of IRS regulation 280e, to state and local taxation issues, the costs of operating a regulated cannabis company continue to remain nearly unendurable.
Learn what may change in the coming six to 12 months so you’ll know how to access debt capital most cost-effectively in this ever evolving environment. No matter your place in the industry or the supply chain from cultivators, manufacturers, vendors, suppliers, distributors and retailers this conversation will provide the insights to meet your financial needs.
At the conclusion of the discussion our panel hosted a moderated Q&A session to provide NCIA members an opportunity to interact with leading minds from the financial services space, join today to contribute to future conversations!
Panelists:
Adam Stettner
Founder & CEO
FundCanna
Sundie Seefried
Founder and CEO
Safe Harbor Financial
02:13 – Equity vs. Debt: With equity dried up, should cannabis companies be looking at debt financing to grow now?
07:28 – Equity vs. Debt: What do borrowers need to do before approaching a debt provider (vs. an equity provider)?
13:25 – Equity vs. Debt: What can cannabis companies or entrepreneurs do to improve their overall credit worthiness prior to seeking capital?
17:16 – How has the interest rate increases by the Federal Reserve impacted capital markets (and the industry at large) in 2022?
26:07 – Audience Q&A: “If there’s “no reason not to have banking” for your cannabis business how can I easily (and inexpensively) establish and maintain a compliant bank account?”
28:56 – Lending: What significant lending challenges are your clients currently facing within the industry?
33:56 – Lending: What advice can you provide business owners for evaluating lenders that you should (or shouldn’t) work with and tips for avoiding predatory lending practices?
39:05 – Cannabis Reform: What impact do you expect President Biden’s recent announcement will have on the industry?
49:32 – Audience Q&A: “Are your financial institutions planning to offer lending and banking services in New York, New Jersey and other new markets?”
51:42 – Audience Q&A: “With the mindset of “Investors are betting on the Jockey not the Horse.” What type of CEO or founding team would be a red flag or not a viable investment?”
55:19 – Audience Q&A: “How can I start to shift my retail company from being primarily a cash-only business?”
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.
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
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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.