Unlike the United States, the legal cannabis market in Canada is not what some describe as a “duffel bag economy” – an ecosystem forced to depend on physical money to function, from consumer transactions to consumer transactions. pay through B2B payments.
Still, that’s not to say that the Canadian marijuana industry is not without financial challenges. Considered a high-risk sector, cannabis remains a difficult space to serve for the country’s main financial institutions (FIs). And, despite the government’s strong involvement in the market, including the importance of government-owned and operated dispensaries and other industry-related companies, there are points along the supply chain where B2B payment delays create cash bottlenecks.
According to CapitalNow Cannabis President Joshua Reynolds and COO Natalie Wawzonek, these factors combine to create a prime opportunity for invoice factoring solutions designed specifically for the marijuana segment. In a conversation with PYMNTS, they described how invoice financing can smooth out capital for high growth companies in a rapidly changing industry.
Extend payment terms
Like many industries and supply chains around the world, the issue of B2B payment terms is one of conflicting interests. Suppliers are pushing to get paid as quickly as possible, but buyers are seeking to delay payment, both in an effort to bolster working capital.
What is unique in Canada is that government ownership of certain marijuana companies usually results in pleasant and predictable B2B payment terms. Further downstream, however, late payments can wreak havoc on cash flow, especially for small businesses. Additionally, Reynolds noted, government entities have started to extend payment terms to 60 days for large customers, creating a chain reaction down the line.
“It forces everyone along the supply chain to have incredibly long payment delays through no fault of their own,” he said. “You’ve got government influence, you’ve got big business influence, then you’ve got small suppliers up the supply chain, mom-and-pop stores, getting hammered. “
The consequences of this are considerable. Reynolds reported on a customer who was forced to abandon a multi-million dollar order from the Ontario provincial government due to working capital issues that he said could have been resolved through B2B payments or faster invoice financing. In other cases, companies who are paid late must, in turn, delay payment to their own suppliers, causing them to miss out on significant early payment discounts.
This is a difficult problem to solve, especially as traditional FIs are reluctant to serve the market with trade and invoice finance solutions. And, as Wawzonek explained, protecting your own business capital needs can hurt those of others.
“Every dollar counts and every day makes a big difference to their cash flow,” she said. “Unfortunately, what makes commercial sense to them affects small businesses waiting for payment.”
Balance the playing field
Understanding this imbalance in the B2B relationship is an important first step for a third-party FinTech to intervene with an alternative to traditional bank financing.
Currently, Wawzonek said, this imbalance not only means B2B payment delays, it can also cause large companies to demand larger discounts for earlier payment, which can also put a small business in financial difficulty.
When a third party steps in, the playing field can be a bit more level. Buyers can always extend payment terms, while suppliers can access working capital faster, without taking any risk. Reynolds noted that this strategy also strengthens the buyer-supplier relationship.
This is a valuable advantage for an industry that has retained its risky reputation, creating a Catch-22 with the financial services space. While traditional banks are reluctant to fund this market, this lack of funding and lack of credit history perpetuates mistrust among business partners.
It’s a market that often operates through word of mouth when buyers and suppliers meet, but as FinTech steps in to help the industry embrace digitalization and smooth working capital, it can also. generate an essential culture of trust.
“Once you start building credit and you buy into both sides of the equation, what you really do is provide a level of trust between both parties,” Reynolds said. “And the cannabis space hasn’t really been trusted at all because of its very nature, where it came from and where it is now.”