Along with the rapid growth of legalization is the rapid growth of the industry’s economic status. For decades, conversations have surfaced surrounding the positive impact that the cannabis industry could have on our country’s economy; fixing taxes, reducing crime, etc.. As we move into 2018, it is finally coming into fruition, but one major aspect is still missing – data on business-to-business transactions within the industry.
Trade credit, a brand-new concept within the cannabis market, is a business’s way of offering goods and services to other businesses without being paid for those items upfront. Much like a consumer makes a purchase on a credit card today but doesn’t pay for it until weeks later, businesses have the ability to place merchandise, for example, on their shelves without paying the producer or manufacturer back until those items have sold. As legalization and thus demand continues to grow, virtually every business within the cannabis industry will need trade credit in order to keep up.
The need for trade credit, much like consumer credit, is in other industries all the time. Think about it – a recent college graduate gets a good job, but has never owned or used a credit card. He has difficulty getting credit because there’s no history. The same holds true for businesses. A new restaurant will have a much harder time acquiring drinks from a beverage manufacturer without paying upfront, versus a well-established restaurant with a good credit score and years of tradeline history.
The cannabis industry, which has largely been a cash-only system, will need to move towards a credit-based marketplace in order to help the companies in the industry grow. Aside from taking safety precautions, manufacturers, suppliers and producers will want to know which companies are credit worthy and which deserve an approval on a trade credit application. A company that has bad trade history or no history at all would not be considered a good candidate, while a company with a strong trade history would be just the opposite.
More and more bigger name companies that are used to operating on trade credit are entering the industry. The issue for them is finding credit information on the smaller businesses who have not yet established a trade credit history.
Trade credit and processes are necessary for businesses to help each other finance their way into the industry. Trade credit already facilitates capital in every market of the U.S., so there is no reason to believe that the same would not hold true within the cannabis industry. It’s growing at such a rapid pace that smaller businesses must start building trade credit history and establishing industry relationships now in order to stay relevant. The industry as a whole needs more trade credit information on the smaller business in order to function. The only solution is establishing an industry-specific B2B trade credit data network.
Trade credit is overlooked in many places but it’s a crucial component of B2B cashflow and is extremely important in making markets work. No market that exists in the world has remained operating in a cash-only environment as it is virtually impossible to fly under the radar for long. The industry’s credit data network is going to be fueled by the growth of the market and the familiarity of big players which are far from cash-oriented businesses. In short order, the entire industry will adopt an understanding and focus on trade credit data and processes needed for the market to make progress.
Smaller businesses need financing to grow, and financing is often done by invoicing and extending trade credit. The winning companies are going to be the ones who are making the right credit decisions and investing their time in establishing trade credit.