B2B Payments

Cannabis Shows Early Signs Of Late Supplier Payments Struggle

The gradual legalization of cannabis in the U.S. and elsewhere has opened up an opportunity not only for new businesses to form, but for those young companies to leapfrog over the growing pains of digital transformation experienced by their peers in other markets, and emerge as tech-savvy, digital companies from the get-go.

However, the regulatory pressures of the marijuana business can also mean the opposite. Many legal cannabis businesses continue to rely on cash, paper and offline methods of communication to conduct operations without access to traditional financial services. The marijuana industry is undoubtedly unique, but when manual processes are the status quo, these companies can face the same pain points that other businesses face when struggling with their own digital transformations: namely, supply chain inefficiencies and cash-flow bottlenecks.

In a recent conversation with PYMNTS, Leaf Trade Chief Revenue Officer Michael Piermont discussed why it’s paramount for marijuana businesses to embrace digitization from the get-go — as much as the current regulatory climate will allow. Of course, that’s not always easy when industry participants are forced to rely on state-chartered banks, or no banks at all.

“They are allowing banking in some of these highly regulated markets, but they’re usually state-chartered banks [that] open up special cannabis [financial services] products,” Piermont explained. “These banks don’t necessarily have all the tools and technology” that market players need.

Translating Consumer Cash To Supplier Payment

For legal marijuana dispensaries, a reliance on cash at the point of sale results in a host of frictions and challenges for both consumers and businesses. Those pain points expand far beyond the retailer’s walls, too, as these businesses are forced to figure out how to utilize high volumes of cash to make payments to their B2B suppliers.

Traditionally, B2B commerce is conducted over the phone and via email. Orders are placed and shipped, and a paper invoice is generated, with retailers using legacy payment strategies to settle those bills.

“Most of the time, a check is written from the dispensary’s bank, where they deposited cash a week before from selling to customers,” explained Piermont. “It’s sent to the cultivator, or sometimes they pay cash-on-delivery to the delivery driver.”

Aside from the obvious security risks that this tactic poses, checks and cash prevent both buyers and suppliers in this market from being able to streamline and automate their accounts payable, accounts receivable and cash management operations.

An Emerging Late Payments Problem

One only has to look at other markets in which legacy processes reign to understand the consequences of a lack of digitization.

According to Piermont, the cannabis industry is beginning to show a late B2B payments problem not because companies are intentionally looking to wield their buyer power over small suppliers, but because a reliance on paper and cash is far from an effective way to accelerate supplier payments.

Even when a supplier provides quality product on time, and even if a dispensary is an ideal customer, “in many ways, they’re just not set up to run these types of B2B payments with manual processes,” he said, pointing to the knock-on consequences of extended payment terms and late invoice payments. “Sometimes they forget. So, on average, you’re seeing a lot of these relationships go 60, 90 [or] 120 days, and not by choice.”

Since this industry is so high in growth, it’s common for businesses in this space to place orders with multiple vendors, or even multiple orders with one vendor in the same week. When those transactions occur on paper and over the phone, keeping track of outstanding payables quickly becomes a headache.

Technology From The Get-Go

Leaf Trade which recently announced a $4.5 million fundraise from Hyde Park Angels, Duke Software Investments and Chingona Ventures operates a wholesale ordering platform, allowing dispensaries and suppliers to conduct trade digitally. According to Piermont, the company’s objective is to migrate industry players away from these legacy processes when placing and fulfilling orders.

Yet, as the company grows, it’s understanding that the friction associated with a lack of technology permeates into buyers and suppliers in this market, well after an order is placed and fulfilled. It seeps into the invoicing and payment process on both sides of a transaction, noted Piermont.

With that in mind, Leaf Trade plans to integrate B2B payments management functionality within its platform to further streamline and digitize operations for clients, from order to pay.

As the regulatory landscape continues to rapidly evolve, Piermont also emphasized the importance of cannabis companies’ embrace of not just technology, but tools designed for this market’s unique requirements.

“There are a lot of different processes that have to be followed, due to the nature of rules and regulations,” he explained, noting that industry agnostic B2B eCommerce platforms are not always equipped to manage the marijuana market’s compliance requirements, nor are they flexible enough to adjust to new rules as they emerge. From packing requirements to payment security, compliance will be at the heart of every process for a cannabis business and at the heart of the technologies they adopt to grow.

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