There’s over $4 billion in outstanding receivables across the cannabis industry now.
That’s a lot of product shipped on a promise, and there’s a clean framework for protecting it.
I’ve spent a career building credit and collection solutions for some of the largest credit departments in the country, and I love the cannabis industry. One of the most useful things I can put to work for it is something credit teams in every other industry already lean on. It’s how they size up a customer before they extend a dollar of terms.
They call it the 5 Cs of Credit.
Here they are, the way they get used every day, everywhere product ships on credit.
- Character: Will this customer pay you, and how do they run their business? Look at their track record. Pull whatever public records and payment history you can find on the owners and the company. It starts with a credit application, and that one step tells you a lot about who you’re doing business with.
- Capacity: Can they generate enough cash to pay you back on time? Not someday. On time. Look for real signs of positive cash flow, not just sales volume.
- Capital: What’s behind this company? Founder money, friends and family, VC, or PE? Thin capital means a thin cushion when things get tight.
- Conditions: What outside forces could hit this customer? A licensing change. A regulatory shift. A bad harvest. A drop in wholesale prices. In cannabis, this one carries more weight than almost any industry I’ve worked in.
- Collateral: If cash flow alone doesn’t justify the risk, what’s the backup? In most other industries, the answer is a personal guarantee or a large line of credit. A new restaurant most of the time doesn’t get terms from its main supplier without one or the other. Cannabis is different. Personal guarantees are rare here, and that’s just the reality of this industry. It means the other four Cs carry more weight than they would anywhere else.
None of this is complicated. It’s a framework, and it’s held up across every industry I’ve ever worked in. The hard part in cannabis has never been just the framework. It’s also been getting real data to answer these five questions instead of guessing.
That’s what we’re building at Reklaim Credit Solutions, so you finally have the data behind these decisions. I’m sharing the framework because I want cannabis operators to win, and the more all of us understand credit risk, the stronger this industry gets.
I know these 5 Cs may not apply to every aspect of the cannabis industry and some may not apply at all. But this is the benchmark the industries use outside of cannabis and something that has a framework that can be helpful to everyone.
So, if it applies to you, run the 5 Cs before your next new customer asks for terms, instead of just saying yes.
The answers might change how you see the customer, and the risk.