Is the Cannabis Industry the Next Growth Industry for Debt Collectors?

Owners will challenge their business development and sales people to find them new clients to service.  Most sales-oriented professionals prefer hunting for new clients in established market segments such as financial services and healthcare because they typically have connections and collection experience to leverage.  Few will venture into new and untapped market segments in an attempt expand their client roster.   A recent article in the Cannabis Business Executive newsletter caught my attention and I thought we would share it with you.

First let me state for the record that this article was sent to me by a friend who knew that we advised owners in the accounts receivable management industry.  Until he did, I didn’t even know a business publication existed yet in the Cannabis industry.  Scouts honor!

The author of the article points out that trade credit is “not currently the norm in the cannabis market,” but that is not deterring this established business development professional from exploring the possibilities for his collection agency.   His thesis is respectable:  “Almost every company in the cannabis industry, whether they are a grower, manufacturer or service provider, are extending some type of credit to a segment of their customers. Most of the credit extended today is “friendship credit” – credit that is extended to a customer you have known for a while and with whom you have developed a personal relationship. But no real credit analysis was performed.”  He believes that trade credit will be the norm in the cannabis industry in the near future, and when it is, he wants to be at the front of the line to provide collection services.

Two things stand out the most to me in this article.  First, the author points out that the credit that is extended within the cannabis industry now is based predominately upon “friendship credit” between businesses with personal relationships established.  This is risky for the collection agency on numerous levels.  For one, it will take the sales team a long time to find business to collect which creates an expensive investment.  The agency also doesn’t have proven collection strategies to deploy in this new market segment.  It is also quite possible that regulators may change things down the road.

Do these risks sound familiar?  They are the same risks that pioneers in the collection industry faced decades ago when they ventured into the collections industry.  Gerry Katz, the founder of GC Services, once told me that he personally spent a lot of his own time in Manhattan soliciting banks to place their past due accounts receivable with his agency for collections.  This was way before the credit card boom of the 1990s when placement volumes were inconsistent, collection strategies were unproven, and deregulation was the theme.  That did not deter Mr. Katz from selling to this marketplace.

Another pioneer in collections, Ron Wilwerding, collected from healthcare providers and other local credit grantors regionally in Omaha, Nebraska where they were based.  He told me that when it came to collections they were “door knockers,” collecting aged accounts the very old fashioned way by walking up to the debtor’s door to collect the account.  Decades later, both of these companies became giants in the collection industry.  If they, and others like them, did not swim upstream to find new business, it is possible that the established collection markets of today would not exist.

We applaud the efforts of this business development professional, and the collection agency he works for, as they venture into the cannabis industry, an untapped market with its own set of risks and potential rewards.

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