Payments in the legal cannabis industry is a tricky nut to crack. While the general expectation is that federal legalization is on the horizon, it will take some time for electronic payment rails to open up to legal cannabis businesses, meaning cash is likely to persevere as the dominant transaction method for the short- to medium-term.
It’s not only consumer transactions that are feeling the pains of an industry reliant on cash, either. Considering the complexities of B2B transactions, cash is not a sustainable method of moving funds from a retail buyer to a cannabis brand distributor or wholesaler.
But there are other pain points in B2B payments for the legal cannabis market, according to Doug Gordon, executive vice president and head of LeafLink Financial. Not all of them are unique, but they are exacerbated by the regulatory complexities of the space.
Speaking with PYMNTS, Gordon discussed the challenge of cannabis sellers offering trade credit to their buyers, an important component of B2B transactions in any industry, but one that is especially challenging for this space.
Challenges ‘On Steroids’
Legal cannabis is generally a new industry, as Gordon discussed, meaning the market is dominated by startups.
On one hand, this can present an advantage to the market: Businesses are not weighed down by the legacy of years-old technologies and processes that create inefficiencies in other industry. On the other hand, when it comes to the cannabis supply chain, many businesses lacked cannabis-specific tools and technologies to operate.
“Retailers were being approached by sales reps, inventory was being managed on white boards and sales were in spreadsheets,” Gordon said.
The B2B transaction itself continues to face significant friction, thanks to the legal complexities at the state and federal level. Because consumer transactions continue to rely on cash, the accounts receivable (AR) and accounts payable (AP) processes within the supply chain can be fragmented. And while Gordon noted that he’s seeing more paper checks being used to settle B2B transactions, the payment method is far from ideal.
On top of these industry-specific challenges, the legal cannabis space faces the traditional hurdles associated with B2B payments: friction in invoice processing and payment reconciliation, cash flow management challenges, and the disconnect between when buyers want to pay and sellers want to get paid.
“All of these issues exist in the traditional economy, but all of them are on steroids in the legal cannabis economy because of the lack of access to tools and services traditionally offered through banks,” said Gordon.
Looping In Trade Credit
One of the biggest challenges in the B2B cannabis supply chain is the inability for wholesalers to offer payment terms and trade credit to their buyers. Because the industry is dominated by startups, a lack of historical business data makes underwriting a challenge. That, coupled with a reliance on cash, makes the B2B transaction process a massive headache.
“Everyone’s a startup, and you can’t really underwrite your customer and understand how much credit you should be giving them, what terms they need or what their limit it,” Gordon explained.
LeafLink Financial is positioning itself as a FinTech company to enable supply chain financing, which addresses two key pain points: a lack of trade credit availability and a lack of access to electronic payment rails to settle the B2B transaction. By purchasing the invoice from the buyer, the company pays vendors via ACH upon delivery, while allowing those suppliers to offer payment terms to their customers. The firm takes on the trade credit risk, using data generated as a result of LeafLink Financial sitting in the middle of B2B relationships.
Gordon explained that because the company has visibility into retailers’ purchase behavior – including history, volumes and trends – it has a better understanding of the B2B relationship to underwrite financing in ways that traditional lenders cannot.
Federal legalization is still a ways off, and Gordon noted that even when it occurs, it will still be some time before the credit card networks begin to fully service the legal cannabis space. Yet the cannabis market is growing rapidly, and its community of startups need solutions today to keep funds flowing through the supply chain.
“I think the challenges that these companies continue to face will be more and more like the challenges that other industries have historically faced,” he said. “We’re trying to accelerate the way these companies are trying to solve those challenges, versus having to wait for federal legalization.”