While trade credit is not currently the norm in the cannabis market today, we believe it will be in the future and with credit there are collections. Almost every company we have spoken to, whether they are grower, manufacturer or service provider are extending some type of credit to a segment of their customers. Most of this credit extended today in the cannabis market is what we call “friendship credit”, credit that is extended to a customer who you have known for a while and have developed a personal relationship with and where no real credit analysis was performed. Friendship credit might be ok in today’s existing marketplace but in the near future, when the rules change, many of your customers on friendship credit are not going to pay you what you are owed on time and some are not going to pay you at all. When this happens, what are you going to do?
The following is a common-sense approach to the problem of determining whether a customer who you have extended credit to, whether it allowing them to float checks to you or giving them 7,15 or 30-day credit terms, is about to become a collection problem where you may need outside help. Customers of yours that have a cash flow problem must choose which vendors they will continue to satisfy and which vendors they will not. If a company has insufficient cash on hand to pay all their vendors on a timely basis, some of their vendors are not going to get paid on time. This can be a one-time problem and things could get back to normal soon, or it can be an endemic problem and if you don’t act promptly it may cost you.
The Customer is Over 30 Days Past Due
The customer has been a solid citizen and always paid on a timely basis. You have transitioned them from paying you COD to limited credit terms and now they are 30 days past due, and this is not the first time it has happened. They answer your calls, but promises to accelerate their payments and clean up the past due balance are not met. They may also be evidencing some of the behavior discussed below. Chances are you that you have a problem and depending on how old the debt gets, turning them over to a 3rd party collection agency may save you some money and in many instances, save you a customer. Yes, your read it correctly, save you a customer and get you paid, that is the goal.
The Customer is Not Returning Your Calls and Re-Ordering
If your customer is past due and ducking you, you have a problem. If they won’t talk to you after repeated attempts to reach them, their debt is 30-60 days past dues and getting older and they are not trying to re-order and pay down the old balance, a collection agency may be your only solution. Collection agencies have trained recovery professionals that focus on working with these types of accounts. A collection agency experiences this problem as a normal course of their daily activity and they are experts at getting your customer to the table, because it’s what they do for a living.
The Customer Has Started Purchasing Erratically
Over time, the customer has always bought a reasonably predictable amount of product on a consistent basis. This is no longer the case and your salesperson on the account can’t understand what’s going on. What is causing this erratic purchasing? It is possible that the demand for your product(s) has become highly variable and the customer is purchasing accordingly, or your customer is having financial trouble and is having difficulty staying current with you so he is now buying from another supplier? If other customers are still purchasing the same products on a consistent basis than the chance that there is a demand problem is small. So, a financial problem may be the reason. This is something that needs to be checked out before it costs you money.
The Customer Has Stopped Buying
If the customer has stopped buying and owes you money, even if it’s not past due you need to be on the alert. For whatever reason, if the account no longer needs you they don’t have a reason to be prompt. If they go 90 days past due you are probably going to need outside help to collect your money.
You Receive Negative Trade Information on the Customer from Other Suppliers
As of now the account is not past due, but you receive some negative trade information on the account from other suppliers in the industry who are also selling to them. This needs to be checked carefully. When a company gets into trouble financially they start allocating their available cash, the more important vendors may not see a problem, but the secondary vendors find the account is falling behind. For example, if the account is a dispensary they need to have flower and concentrates on the shelf and therefore those suppliers will get paid first. But if you manufacture infused THC/CDB sports drinks that do not sell as well as flower and concentrates you might not get paid on time if the dispensary has cash flow issues. If you have relationships with other suppliers leverage them to find out what is going on.
Final Thoughts
For companies servicing the cannabis market and extending trade credit you will need to implement a collection policy that details how to manage and collect from a delinquent customer as well as what is your point of no return is where you need to pull the trigger and place the customer with a 3rd party collection agency. The warning signs listed above are usually evident during your internal collection efforts and the sooner you recognize them the better. We recommend being pro-active with your internal efforts as soon as your customer is one day past due. If the customer is more than 30-60 days past due a serious problem may be looming and the account should be turned over to a collection agency to maximize your cash flow. But even if your customer is not 30-60 days past due you may be about to have a problem so it is important to recognize when an account evidences any of the behavior discussed above. If they do, you need to get on their case sooner rather than later. Prompt action will save you money. If the account is behaving erratically you should turn them over to a 3rd party collection agency as they trigger the 90 days past due signal because probably things are not going to get better, only worse.
If your company has a collection problem and needs help, visits www.agaltd.com
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