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Cultivating B2B Payments Trust In Canada’s Cannabis Market

Unlike in the U.S., the legal cannabis market in Canada is not what some describe as a “duffel bag economy” — an ecosystem forced to rely on physical cash to operate, from consumer transactions to payroll to B2B payments.

Yet that doesn’t mean Canada’s marijuana industry isn’t without its financial challenges. Considered a high-risk sector, cannabis remains a difficult space to service for the country’s top financial institutions (FIs). And, despite the heavy involvement of the government in the market, including the prominence of government-owned and -run dispensaries and other industry-related businesses, there are points along the supply chain in which delayed B2B payments create cash flow bottlenecks.

According to CapitalNow Cannabis President Joshua Reynolds and Chief Operating Officer 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 lumps for high-growth businesses in a quickly evolving industry.

Stretching Out Payment Terms

Like many industries and supply chains around the world, the issue of B2B payment terms is one of conflicting interests. Suppliers press to get paid as quickly as possible, yet buyers seek to delay payment, both in an effort to strengthen working capital positions.

What’s unique to Canada is that the government’s ownership of some marijuana companies typically results in agreeable and predictable B2B payment terms. Further downstream, however, the payment delays can wreak havoc on cash flow, particularly for smaller businesses. What’s more, noted Reynolds, government entities have begun to lengthen payment terms up to 60 days for larger customers, creating a chain reaction down the line.

“It’s forced everybody along the supply chain to have incredibly long payment delays to no fault of their own,” he said. “You’ve got a government influence, you’ve got a big business influence, and then you’ve got small suppliers along the supply chain, mom-and-pop shops, that are getting hammered.”

The consequences of this are far-reaching. Reynolds pointed to one client that was forced to drop a multimillion-dollar order from the Ontario Provincial Government due to working capital issues he said might have been resolved through more timely B2B payments or invoice financing. In other instances, businesses that are getting paid late are, in turn, having to delay their own supplier payments, causing them to miss out on significant early payment discounts.

It’s a difficult nut to crack, particularly as traditional FIs are wary of servicing the market with trade and invoice finance solutions. And, as Wawzonek explained, protecting one’s own business capital needs might be harming another’s.

“Every dollar counts, and every day makes a big difference to their cash flow,” she said. “Unfortunately, what makes business sense for them affects the smaller firms who are waiting for payment.”

Balancing The Playing Field

Understanding this imbalance in the B2B relationship is an important first step for a third-party FinTech to step in with an alternative to traditional bank finance.

Currently, said Wawzonek, that imbalance doesn’t only mean B2B payment delays, it can also lead to larger firms demanding larger discounts for earlier payment, which can also put a small business in financial hardship.

When a third party steps in, the playing field can be a bit more level. Buyers can still lengthen payment terms, while suppliers can access working capital more quickly, without either taking on risk. Reynolds noted that this strategy also strengthens the buyer-supplier relationship.

That’s a valuable benefit for an industry that has retained its risky reputation, creating a Catch-22 with the financial services space. While traditional banks are reluctant to finance this market, that lack of financing and lack of credit history perpetuates distrust between business partners.

It’s a market that often operates on word-of-mouth when buyers and suppliers find each other, but as FinTech steps in to help the sector embrace digitization and smooth out working capital, it can also drive a much-needed culture of trust.

“Once you start to establish credit and you underwrite both sides of the equation, what you’re really doing is providing a level of trust between two parties,” said Reynolds. “And the cannabis space has not really had trust at all because of its very nature, where it came from, and where it is now.”

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