Delinquent payments represent an existential threat to cannabis businesses nationwide, according to preliminary findings from a survey conducted by Whitney Economics.
Problems due to late payments are affecting the entire cannabis supply chain, regardless of the market or size of the operator, though it tends to impact growers, manufacturers and ancillary businesses more than retailers, the report indicates. Well over half of the respondents (59%) reported that delinquent payments have a greater impact on their business than 280E, the federal tax policy that prevents cannabis businesses from taking standard deductions allowed to other businesses.
The survey also found that delinquent payments were affecting 43% of respondents’ ability to service their debt, and 32% of respondents’ ability to pay state or federal taxes. Some operators said their delinquent accounts receivable were in excess of two months of revenue, totaling millions of dollars. Multiple respondents indicated that delinquent payments have forced their companies to lay off employees.
The impact of delinquent payments has already been seen across the country, with California being one of the most hard-hit markets. Herbl, at one point one of the largest cannabis distributors in the country, ceased operations in the summer, claiming retailers owed the company about $10 million. Meanwhile, numerous producers and manufacturers were pushed toward the brink of insolvency on the other side, allegedly waiting on millions of dollars in payments from Herbl, which had already skipped out on a $17 million tax bill with the state.
“At a time when cannabis licensees are struggling economically, state legislators and regulators appear to be tightening controls on this market. These controls, when combined with lack of cash flow, may have catastrophic impacts on businesses,” said Beau Whitney, founder and chief economist at Whitney Economics, in a press release.
Whitney added that the problem is more acute because cannabis businesses generally do not have access to traditional financial tools, such as bridge loans, to help them deal with delinquent account receivables, nor do they have access to bankruptcy protections, due to the federal illegality of cannabis.
The objective of the survey was to determine how pervasive delinquent payments are in the cannabis industry and to assess the overall economic health of cannabis licensees. Previous research conducted by Whitney Economics has shown that less than 25% of cannabis operators in 2022 were profitable.
“Given the serious nature of this issue and the potential for business failures and labor displacement, state and federal policy intervention would be justified,” Whitney said.
Whitney Economics will continue collecting survey responses through January for a more complete analysis on the issue.