California Cannabis Credit Crunch

30 May California Cannabis Credit Crunch

The California cannabis market is truly struggling all the way around. Cannabis businesses and those who work with them closely face mounting financial pressure. Because of the credit crunch in California cannabis, the state and various impacted distributors and brands are taking steps to help shore up the issues created by cannabis companies that can’t (or sometimes won’t) pay their bills. Given the state of the overall industry right now in most locales, it wouldn’t shock me if other states and industry trade groups follow suit with California.

Cannabis regulators may step in

First, California is seriously flirting with the passage of AB 766. It would be something new for a state cannabis regulator to take action over B2B commercial dealings of this nature. Failing to pay bills when due (other than tax) usually isn’t going to amount to an actionable regulatory violation where you can approach regulators for help. AB 766 would change this in the Golden State. The bill summary provides:

This bill would, except as specified, require a licensee to pay for goods and services sold or transferred with a total value of at least $5,000by another licensee no later than 15 days following the final date set forth in the invoice or invoices. The bill would require a licensee who sold or transferred goods to another licensee and who has not received payment in full 15 days after the final date set forth in the invoice to report the unpaid invoice to the department, as specified. The bill would require the department to notify a licensee of this report, issue a notice of warning, or, in its discretion, issue a citation or commence a disciplinary action against the licensee if the licensee fails to pay the outstanding invoice in full by 30 days after this notification, as specified, and, for multiple failures to comply with these provisions, commence a disciplinary action, as specified.  The bill would prohibit the licensee from purchasing goods and services from another licensee on credit until the licensee pays the outstanding invoice in full. The bill would, for purposes of these provisions, prohibit the final date set forth in an invoice for payment of the invoice from being later than 30 calendar days from the date the goods or services are sold or transferred. The bill would specify that these provisions do not apply to an invoice for a sale or transfer made before January 1, 2024.

We recently wrote a post about why AB 766 could lead to more harm than good, which you should check out.

The “no fly” list developing

L.A.-based Credit Management Association (CMA) is taking a look at the many accounts receivable now plaguing a good number of distributors and brands in California. Those distributors and brands apparently hired the CMA to do the analysis and compile a list of “no go” retailers who continually stiff other cannabis businesses on their bills. See here as reported by MJ Biz Daily. Per MJ Biz Daily, “the ‘red’ list, according to group members, highlights retailers and delivery providers that owe at least $25,000 for products and are 90 days late or more on payments, often categorized as delinquent.”

It’s estimated that there’s about $1 million outstanding in unpaid invoices from California cannabis retailers. And what’s the point of compiling this kind of list? According to CMA’s website, ” . . . by submitting your accounts receivable data to Credit Management Association, you can positively (or negatively) affect your customer’s payment history, as the information is aggregated safely and securely.” This particular data is going to help the entire California industry (maybe even nationally depending the retailer) identify high risk accounts where net terms or any kind of credit shouldn’t be extended. It may also hasten the demise of these particular retailers as a result. Ultimately, this list will be a helpful tool to cannabis-related CMA members.

The main California cannabis problems remain

I’m glad to see the CMA accept cannabis clients (and hopefully it’ll adopt cannabis as one of its 250 industry groups). This helps to further legitimize the industry and helps licensees gauge risk across the supply chain. However, even with the Department of Cannabis Control and the CMA helping to identify and trying to redress the issue of lots of accounts receivable, it doesn’t solve the main California cannabis problems that contribute to those cannabis retailers being unable to pay their bills.

As we’ve said from the inception of this democratic experiment, the local control stranglehold of cities and counties is a problem. Because cities and counties can and do opt out of legalization altogether, California only has pockets of legalization and large swaths of cannabis desert where the illegal market rages on. We also have fairly high state taxes that probably will not diminish anytime soon. Same problem with certain local taxes, too (and retailers now bear the main brunt of those state taxes).

Additionally, the state has not done a good job consistent enforcement against both illegal market actors, or against licensees who openly commit a variety of crimes and regulatory violations that undermine law-abiding licensees. (See the issue of burner licenses.) Unless and until the foregoing issues are seriously addressed, I think that CMA list of non-credit worthy actors will only expand in California.