Cash-flow pain for your hemp business? Try receivables factoring

Editor’s note: This story first appeared in the MJBizFinance newsletter, which you can get every week delivered to your inbox. Just sign up here.)

You’ve done the work.

You filled the orders.

The bill went out.

Now you have to wait to get paid.

And wait.

And … wait.

How pervasive is this situation? Very.

It typically works like this:

• XYZ Retailer orders the goods it needs – say, 200 units of a delicious 10:1 edible.
• You, the product manufacturer, deliver them.
• Customers pay cash before leaving the store.
• Then – on its own time – XYZ Retailer eventually pays you.

For large, mainstream suppliers, this presents little long-term risk.

Procter & Gamble sells scads of Tide all over the world. The company has billions of cash on hand.

It can easily afford to keep running for months without a dime in revenue.

But smaller manufacturers – including thousands of small cannabis businesses – often don’t have this financial flexibility. You need cash now to make payroll and keep the lights on.

If you’ve ever found yourself in this situation, you have an option you might not realize.

It’s a special sort of financing called “receivables factoring.” A factor can help speed things along and get you the cash you need to take care of business.

The factor will:

• Examine your receivables history. (You can actually do this for them – accounting software such as QuickBooks can easily create a receivables aging report.)
• Make an assessment as to the credit worthiness of your customers – do they pay their bills? – and offer you cash up front for your receivables. This is usually faster than working with a bank – if you can even find one that works with cannabis businesses.

Instead of sending you the check, the buyer (XYZ Retailer, in our example) sends it to the factor, who keeps a share for its efforts.

Factoring is a $140 billion-a-year business, one that’s growing at a compound annual growth rate of 8%, according to California-based industry tracker Grandview Research.

What will it cost you? Typically, between 1% and 4% of the total value of the invoice.

If you have a stack of $100,000 worth of receivables, expect to pay$1,000-$4,000 to get the cash faster.

The price you will be paid for your receivables is determined by a few variables, namely how long you have been in business, the size of your average invoice, their age and a general assessment of your customers’ credit worthiness.

Be warned up front that many factors don’t work with cannabis companies, but a few do.

Try a specialty factor such as Hasanov Financial. The New York-based company does business in all 50 states, and its website says it has a cannabis presence.

How to factor your receivables:

• Determine your current cash needs. Do you need to make payroll? Order supplies? How much cash do you need?
• Gather the data. Your accounting software can do the heavy lifting here.
• Have a conversation. The factor will have a series of questions.
• Do some due diligence. It’s a wise idea to do some research on the factor. Is it a member of the California-headquartered International Factoring Association? Does it have a file with its local Better Business Bureau? What is the sense you get from its online presence? (Many of these companies have terrifically informative websites.) It’s also smart to ask to speak with a satisfied customer – what was their experience? What did they learn? What would they do differently next time?
• Ask about their specialty.