The legal cannabis industry in the United States is expected to generate between $31 billion and $34 billion in revenue during 2024 and $87 billion by 2035. Yet, a Whitney Economics study to be released later this year discovered only 27.3 percent of licensed businesses nationwide are profitable. That’s an improvement over the 24.7 percent that reported profitability in 2023, but both figures represent a remarkable decline from 2022, when operator profitability stood at 42 percent. Compared to the 65 percent of traditional small businesses that are profitable in an average year according to U.S. Chamber of Commerce data, the cannabis industry looks downright anemic.
What’s more, 30 percent of cannabis businesses that responded to Whitney’s 2024 survey reported they’re losing money. Surprisingly, the biggest drain on their finances isn’t federal taxes. Instead, companies reported delinquent accounts receivable are responsible for putting their operations in jeopardy.
At the end of 2023, delinquent receivables in the industry totaled $3.8 billion. Whitney Economics Chief Executive Officer Beau Whitney expects that figure to balloon to about $4.2 billion this year—or more than one and one-half months of the market’s total revenue. Some survey respondents indicated their delinquent receivables balances exceeded two months’ revenue and totaled millions of dollars.
“People are trying to run twelve months of business off ten months of cash flow,” Whitney said. As part of each year’s survey, his team speaks directly with operators. “Some are like, ‘I don’t know how I’m going to make payroll,’” he revealed. “Others don’t know how they’ll pay their taxes.”
Whitney calls the level of delinquent receivables an “existential threat” to the industry, rippling through every sector from large multistate operators to ancillary businesses like attorneys and accountants. Cultivators, who are owed about 27 percent of the total delinquent balance, struggle to plant, raise, and harvest crops, threatening the entire supply chain. About 65 percent of them told Whitney Economics their past-due receivables—most of which are forty-five days or more late—exceed their monthly revenue. Processors and manufacturers, whose goods compose about 45–50 percent of retail revenue, own about 7 percent of the industry’s delinquent receivables. Distributors claim less than 1 percent of the unpaid balance, but because of their pivotal role in the market, those receivables play an outsize part in the industry’s health.
Counterintuitively, vertically integrated operators—those whose stores sell products produced by other divisions of the parent company—hold the lion’s share of unpaid receivables: 66 percent. Primarily, according to Whitney, that’s because successful vertical integration requires massive scale. In markets where retail is hyper-competitive, vertically integrated operators “don’t have enough capacity to move all their goods [on their own], so they depend on other retailers to sell much of their product,” he said. “Because retailers are notoriously slow to pay, they’ve ended up with mountains of receivables.”
For small operators, past-due receivables represent an especially dire threat—for their businesses and the market as a whole. “Some of these guys put up their house as collateral on a loan to start a business, and then if they get behind because their customers aren’t paying them, they can’t catch up,” Whitney said. “Economic desperation is pushing people into the illicit market. They do a hybrid model where they get most of their revenue through the front door but another part through the back door. It’s the only way they can survive.”
FundCanna founder and CEO Adam Stettner is similarly concerned. With more than twenty years of experience in on-balance-sheet lending and billions in loans underwritten, he believes the whole industry’s health is at risk.
“Accounts receivable is creating Swiss cheese in balance sheets,” he said. “Companies are laying out money to make product, pay for labor, or purchase raw goods, and then they’re not getting paid.
“Ten to 15 percent of total legal sales are either delinquent or unpaid, and we’re watching [accounts receivable] continue to grow in people’s financials,” he added. “That goes way beyond being untenable or frustrating. It’s simply not sustainable.”
Examining the problem
It’s tempting to blame retailers for the cascading effect of delinquent receivables. After all, retail is where the majority of the industry’s revenue enters the system, and that revenue is all cash. Some of the blame may be justified, according to Whitney Economics’ March 2024 report Cannabis Delinquencies: an Existential Threat to the U.S. Cannabis Industry. “Retail carries the lowest amount of [accounts receivable] delinquencies while carrying the highest amount of delinquent accounts payable,” the report states.
Due to their role as revenue gatekeepers, retailers control the market, according to Beau Whitney. Manufacturers and cultivators depend on retail exposure for their very existence, and retail operators will “just take providers off the shelves if they complain about not being paid,” he said. “They have that level of power, and they use it.”
But if retailers are allowing accounts payable to linger, where does all the money they take in go?
According to NewLake Capital Partners co-founder and CEO Anthony Coniglio, the funds don’t stay in retailers’ pockets. “There’s tension between cultivators and retailers, but retailers are not taking advantage of cultivators or other wholesalers,” he said. “Two years ago, wholesale prices decreased but retail prices didn’t, so some retailers were slow-paying even though they had the cash. Now, retail prices are falling faster than wholesale prices. The cash that was there two years ago has gone to consumers through price decreases.
“Everybody is struggling,” he added.
Undeniably, retail is an expensive business, especially in cannabis. Not only do stores operate on slim margins and face the highest licensing fees and labor costs, but they also bear the majority of the industry’s tax burden. Of the $2.1 billion in excess federal taxes (that is, taxes beyond what traditional retailers would pay) assessed against the industry as a whole in 2022, retailers shouldered $1.8 billion. Thanks to Internal Revenue Code Section 280E, which prohibits businesses that traffic in federally illegal substances from deducting most standard expenses, retail operations in some states are taxed at an effective combined federal and state rate of 70 percent. More commonly, the rate is closer to 40 percent—still nearly double the 21 percent most traditional businesses pay.
Consequently, Whitney Economics suggested the threshold of viability for retailers is $2–$2.5 million in revenue per store per year. The firm’s survey found the average reported annual revenue per store to be $2.4 million. If that’s the case, the average store is breaking even, which means accounts payable are at risk of nonpayment when the economy dips or unexpected events disrupt normal operations.
During his seventeen years in the industry, Jason Vedadi has witnessed retail operations up close at companies including Harvest Health & Recreation, Oasis Cannabis and, most recently, Story Cannabis, which he co-founded in 2022. He admits retailers sometimes “stretch out payments to 90 or 120 days, and that causes stress on balance sheets.”
But, he continued, “they’re not making enough money to cover their bills. A lot of them have debts, taxes, or they might be in growth mode. So, they use [money that otherwise would go to] payables to fund operations for as long as they can.”
Harvest, which Vedadi co-founded and served as executive chairman, found itself in that predicament, he said. “We were growing too fast,” he revealed. The company operated profitably in the Arizona and Maryland medical markets, “but we went through a turbulent time in 2019 and had to recapitalize and stabilize.”
As part of stabilizing, the company made some tough decisions about products and personnel, where it operated, organizational structure, and overall strategy. Two years later, Trulieve acquired Harvest for $2.1 billion in stock. “Ours turned out looking like the greatest story on Earth, but we had some massive turbulence and made some mistakes,” Vedadi said.
According to Coniglio, extending accounts payable in order to conserve working capital is not uncommon. “It’s not a new problem and not specific to this industry,” he said. “It just may be exacerbated in this industry.”
Stettner believes the industry’s prevailing financial dynamics encourage the behavior.
“One of the things that’s unique about this industry is that it started as [cash on delivery],” he said. “Nobody would ship goods until they were paid. But then you had all these states that did a less-than-stellar job at licensing. States will license as many or more cultivators as retailers. First, that leads to price compression. Then, once price compression runs its course and normalizes, you’ve got an abundance of choice—and that means buyers dictate the price.”
It also means buyers can demand payment terms. Extending credit represented a monumental shift in the way the industry operates, allowing both suppliers and retailers to grow. The problem, Stettner said, is the payment term that best meets suppliers’ needs, net thirty days, doesn’t match the retail revenue cycle. In cannabis, that cycle “is closer to four or four and a half months,” he said.
Retailers are wary of tying up their ready cash in inventory for that long, especially with equity capital on hiatus and traditional funding like bridge loans and lines of credit either nonexistent or exorbitantly expensive. So they slow-walk payments to suppliers for as long as they can, often ordering new stock before they’ve paid off their previous balance.
“Suppliers allow their accounts receivable to grow because they believe it’s better to keep selling products to slow payers than to stop future sales entirely,” Coniglio explained. “By and large, suppliers have been exceedingly patient versus other industries where they would have been quicker to cut off customers for nonpayment. Suppliers tend to be patient because the loss of sales causes a bigger gap on their [profit-and-loss statements].
“What benefits retailers in this industry is that a lot of other retailers are in the same boat,” he added. “Suppliers can’t cut off huge chunks of their customer base.”
Political and regulatory uncertainty also encourage suppliers to be patient, Coniglio said … to a point.
“How long their patience will last is a function of potential catalysts ahead,” he said, mentioning rescheduling and the subsequent withdrawal of 280E business-deduction restrictions, both of which could inject significant capital into the industry. “The people who are owed money are thinking there are opportunities for the world to get better, and the financial picture could turn around.”
Implicit in that worldview is an unpleasant uncertainty, he added: “If those catalysts don’t materialize, do people lose hope for the future and cut off terms?”
Financial and regulatory solutions
Fixing the industry’s cascading delinquency issues won’t be quick or easy. In part, that’s because two of the largest stressors are outside the industry’s control: taxes and regulations.
“This industry is overtaxed to the level of egregiousness, which leads to inefficiency,” Stettner said. In addition, “if you’re going to expand, you have to run each state as a completely new and autonomous entity. Those are two huge pain points.”
Whitney believes legislators and regulators must become more attuned to the industry that exists today, not the industry as it was in the early days post-legalization. Allowing interstate commerce, limiting licenses, and reforming tax structures would be good places to start if the goal is to improve cash flow. Licensing is particularly crucial, he said, because his research indicates that by 2035 the U.S. industry could add 25,000 to 30,000 new licensees to the roughly 40,000 that exist now.
“There needs to be a new vision for how to regulate cannabis,” he said. “The same old ways just simply are not working. Because regulators are not addressing commercial viability [when they issue licenses], they’re failing in their other public policy objectives such as public safety, public health, and beating back the illicit market. By right-sizing licensing, they’d facilitate growth and consumer transition into the legal market.”
In addition, “Instead of limiting the distribution of marijuana through dispensaries—which is a failed model, because it puts a cap on demand—adopt the hemp distribution model,” he said. “Put products in gas stations, grocery stores, and convenience stores and regulate cannabis like alcohol.”
In fact, “regulators could mandate vendor payments like they do in alcohol,” Whitney added. “If alcohol sellers get behind on payments to vendors, they’re prohibited from getting more product until they pay their bills.
“You really need to push the reset button on all these processes, and then you can have a more functional market,” he said.
Taxation is a more complex issue. In states like Oregon, operators can’t renew their licenses if state taxes are unpaid. At the federal level, though, some companies delay tax payments to free up working capital. According to Stacy Litke, vice president for banking and financial services at Green Check, the Internal Revenue Service charges 18-percent interest on tax debt, which is lower than the rate at which many businesses can borrow on the commercial market.
Using the IRS as a de-facto lender may not be as attractive if a proposal to move cannabis from Schedule I to Schedule III under the Controlled Substances Act, currently under consideration by the Drug Enforcement Administration, goes through. Although reclassification wouldn’t make the plant federally legal, it would dispose of 280E’s restrictions on federal tax deductions, thus freeing up operating funds. Litke said 40 percent of industry businesses have indicated they would use an infusion of cash from 280E revocation to clear debt, including past-due accounts payable.
Even so, according to Whitney, zeroing out the industry’s delinquencies “probably will take two to three years.”
Another critical piece of the puzzle, in Litke’s estimation, is encouraging banks to engage with the industry in the same ways they engage with other sectors. “Most lending going on now typically involves real estate,” she said. “That’s a ‘hard asset’ financial institutions know how to handle. But what this industry really needs is lines of credit so businesses can draw on those to pay their providers. Line-of-credit financing is not prevalent yet, because it’s more nerve-wracking for financial institutions. They can’t take product for collateral.”
Some ancillary companies are stepping in to fill the financing gap. Wholesale platform LeafLink launched a “man-in-the-middle” program in September. Called Payment on Sell Through (PoST), the software tracks invoiced products and automates weekly bank-to-bank transfers from retailers to product brands based on seed-to-sale compliance data. “This new model will help alleviate delinquent payments to brands, free up needed capital for retailers, and provide data insights to help both make better business decisions,” said Chief Product Officer Matt Hutchinson.
Within a month of launch, 140 businesses in Colorado, Michigan, and Mississippi were using the system, he said: 100 retailers and forty brands. LeafLink plans to expand the program to California, Missouri, and Oregon during 2025’s first quarter, with nationwide coverage expected by the end of the year.
PoST is essentially a consignment program with a middleman, but there is a time limit on transactions: After sixty days, whatever products have not been sold will be debited from the retailer’s account to clear the invoice. Alternatively, with agreement from the supplier, retailers may return unsold goods. LeafLink encourages buyers and sellers to work together to resolve unsold inventory issues, because “if a product sits on the shelf for sixty days, nobody wins,” Hutchinson said.
PoST assesses suppliers a fee of 2.25–3.5 percent of each transaction, which Hutchinson called “very reasonable” compared to the cost of delinquent receivables and stockouts during busy seasons. Plus, “We see a lot of benefit in furnishing the data to brands’ sales teams,” he said. “Now sales representatives have quantifiable information. Leveraging those insights can accelerate sales growth.
“The detailed visibility also helps brands in upstream product development based on real consumer data,” he continued. “The result is a more collaborative partnership between brands and retailers to optimize product sell-through and meet consumer demand.”
FundCanna’s ReadyPaid, which also launched in September, functions like a buy-now-pay-later service for business-to-business transactions. FundCanna underwrites the buyer and pays the seller. Thirty days later, the buyer can either pay the balance on the interest-free short-term loan or opt to extend payments, including interest, over as long as seven months. “Add a small cost of capital, and they can make twenty-four weekly installments or choose to pay back the entire balance at any time,” Stettner said. “They only pay interest for the time the money is used.
“Our goal is to mitigate ballooning receivables and payables by sitting in the middle of transactions,” he added.
Litke, whose firm facilitates solutions for clients through partners like FundCanna, said man-in-the-middle programs have much to offer an industry where finances are tight, outside funding is scarce, and trust has been compromised. She mentioned 240 Logistics and GrowFlow Live are considering adding buy-now-pay-later options to their offerings.
“The more folks who get involved in the middle of the process and are willing to lend, that’ll certainly help,” she said. “I think we’re going to see a variety of different ideas and solutions, maybe as soon as the middle of next year.
“It takes time to put these things together,” she added.
What businesses can do
In the meantime, businesses are not without coping strategies. Some are old-school simple.
“As a supplier, you can insist on cash terms,” Whitney suggested. “Some buyers will go for it; some won’t—and [cash-up-front terms are] only possible in some states.”
Coniglio proposed “binary outcomes—pay or don’t pay—are not the only solution. Chief financial officers are now asking, ‘What’s the minimum I can pay to keep the supplier happy?’—usually coupled with an explanation about why the supplier should continue to sell to them.”
And, he reminded product brands, “the best defense is a good offense. If you have a good product that’s in demand, you’ll be in a better position to get your customer to pay.”
Story Cannabis’s Vedadi agreed but warned even the most popular brands can become mired in accounts-receivable nightmares. His advice? “Be stubborn about who your partners are at retail. If you ultimately don’t feel your customer is going to survive… I know it’s hard to give up those sales, but you need to pull back. If I had to shrink a little bit but I knew that meant I would be around in six months, I’d shrink.
“Take a hard look at everything deal by deal, person by person, and make a solid business decision,” he continued. “Tighten up timelines the best you can. Work with partners the best way you can so everybody gets a win.”
Above all, he said, “focus on your balance sheet and know you’re going to survive in the end. In cannabis, the balance sheet is more important than anything else.
“It took my team a decade to get good at this, but it’s second nature for us now,” Vedadi said. “With rescheduling coming and both presidential candidates indicating a pro-cannabis stance, there are better days ahead.”
