As the son of a commercial collection attorney, Brett Gelfand never wanted to get into debt collection. But when he found himself in the thick of the cannabis business in Colorado, where delinquency rates were through the roof, he saw an opportunity that would lead him to create Cannabiz Collects – the only cannabis debt collection agency.
Brett started wholesaling his product on terms in 2015, before that was common in the industry. Because their mountain facility needed to compete against the Metro Denver and Boulder cannabis market, they did their own deliveries. Faced with the hassle of collecting cash payment upon delivery, they decided to start a credit program and give retailers 7-15-day terms.
“It was magic,” Brett says. “Within months sales went through the roof. Everyone was patting me on the back, and then right when it came time to collect, the lights changed fast. I went from spending my time on sales marketing to just trying to collect money. I was calling dispensaries myself every day. It was all about cash flow, because we didn’t realize how big of a problem it was going to be until that first cycle came around.”
Faced with a pile of unpaid invoices, Brett kept hearing, “Sorry, the money’s not ready. Oh, we can’t send a cheque or a wire because we don’t have a bank.” Costs piled up as they sent their drivers out to make collections. Records got tangled. It was a mess. They accumulated around $500k of accounts receivable on their books that Brett was personally trying to collect.
“Delinquency then was over 50%,” Brett says. With no real credit reporting or credibility check on cannabis companies, “it would be flipping a coin to see if somebody was going to pay their bill or not on time.”
Today, Brett’s cannabis-focused agency handles around $4.5 million of collections every month, totaling around $135 million since inception. At the same time, he works with the Cannabiz Credit Association to shed more light on credit worthiness – to help businesses avoid needing to resort to collections in the first place. As more adult-use markets come on line and mature, that number is only increasing.
“It’s our job to provide proactive solutions versus just being reactive, which has literally been the moral of the story in cannabis so far: ‘Let’s react when something happens.’”
The cannabis industry faces more financial challenges than most, and bad collections cause a ripple effect across the whole supply chain. Brett experienced that himself when he ran a vertically integrated cannabis company. “We extended terms, planning on cash flow,” he recounts. “We expected to get paid late sometimes, but when we didn’t get paid 50% of the time, what did that look like for all the vendors we owed money to?”
So what can cannabis businesses do to make sure they stay ahead of the bleak statistics? Here’s Brett’s best advice.
1. Set Your Credit Policy
When it comes to credit policy, a lot of cannabis cultivators, manufacturers and brands keep things loose. Personal guarantees are not big in the cannabis industry and with so much competition, operators worry that if they don’t extend favorable terms to every buyer, they’ll lose the sale.
But when you extend terms, you’re essentially acting like a bank, giving a free loan. At the very least, you need to decide a company-wide policy about who gets credit and how much.
“We know that we need to do something about it, and we need to have better processes, procedures,” Brett says, “just like if you’re going to get on the football field, you better wear a helmet.”
“Maybe you just ask for a 25-50% payment up front, so you aren’t risking everything if they end up not paying.”
Part of having a policy is conveying your expectation to customers – before bad habits, like late payments, get started. Train your customers to pay on time – and (for the most part) they will.
2. Weed out Bad Actors
Credit ratings agencies don’t have data on cannabis, making it impossible for operators to take the usual steps a business would take when extending terms. Using Cannabiz Collects’ data, Brett created a proprietary list, updated in real time, to allow members of the CA to ensure the reliability of their business partners.
“Before you do business once with somebody, it allows you to search a company’s name and find out, ‘Have they been sent to collections? What bucket have they been in, in the last three or six?” While he imagines more detailed data to be available in the future, “for now, we’re just trying to give cannabis companies insight into payment behavior of who’s paying on time or not.”
“After spending so much time trying to grow the best flower and picking the best employees, all the staffing and recruiting, all the perfect marketing and all the perfect packaging, and you’re going to ship a product blindly to someone that most likely won’t pay you? It’s absurd and ridiculous, and I think it needs to change.”
Brett Gelfand, Cannabiz Collects
3. Incentivize Your Sales Team Appropriately
Sales teams want to sell. That’s how they get paid. But there’s a difference between sales and income – and guess which one pays the company’s bills? A $10k sale might make your financials look good this month, but what’s the bottom line? Three months from now, that’s going to have to come back off the books if they don’t pay.
“Ideally everyone should have a credit manager or a virtual CFO to help them make these decisions,” Brett says, but in reality, the decisions are made by sales teams.
In addition to a company policy around extending credit, companies should incentivize salespeople on collections. “It happens in any industry, with the most sophisticated salespeople. You want to make the sale to a company that might be a credit risk, and you look the other way and take a bad deal. But it doesn’t take much to wipe out your profit margin with one bad decision.”
4. Use a Collection Agency
Once you have a bill that’s 90 days past due, that’s when the collections process ideally starts. If you go past that and spend your own resources and energy (or, even worse, bringing in a law firm too soon), it can get very expensive.
“Before 90 days, it’s totally valid to think you can collect. But when I’m hearing that four, five, six months later, an owner is still sending emails and texts, that’s a problem (unless you have true, active communication with a debtor who is really coming through with their promises to pay, then you don’t want to disrupt that relationship). The typical success rate for a third-party collection agency is around 20%. So, if a business is taking a 20% at-bat, after that many months, to chase an account, that’s a poor business decision.”
A third-party debt collector should work on commission – so they only get paid if they collect. Using various strategies, including negotiation of partial payments, they use their data to figure out which debtors need to be escalated to legal action – always in consultation with the client.
In addition to saving time and money, third-party debt collection services help take emotion out of collections, especially if there’s more than just a business relationship with the person who owes money.
“It’s a mix between being really good at working out issues and also being able to help guide our clients to take that decision fatigue off of their lap, because this is just business for us. That’s extremely important in both the credit and the collection side, is to separate your emotions and your relationships from business, because you might be doing business with a new retailer who was friends with your cousin. It’s crucial to have that separation.“
5. Bring Your Cash Flow Into the Equation
The better your cash flow, the more risk you can take. That means you can safely extend longer credit terms. It also means you can be more confident that you can pay your own vendors back according to their terms.
“Most businesses are running on very low cash flow,” Brett says. “But a lot of business owners aren’t taking the time to lay out what their weekly cash flows are, much less understand what their revenue cycle really looks like.”
When you’re tackling unpaid debt, knowing your cash flow cycle can help you determine how quickly and aggressively you might need to collect on debt. Is it better to accept a partial payment immediately or hold out for full payment that may come in months but take the risk of non-payment? It’s all part of the process of running a tighter business: removing emotion and working with data.
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