What Credit Managers Should Know About Consignment Sales
Michael C. Dennis, MBA, CBF and Steven Kozack

Under consignment terms, the consignor (the supplier) ships goods to the consignee (the recipient) to sell. The supplier retains title to and ownership of the goods in question. The consignee makes payment to the consignor if and when the goods are sold. A consignee is not obligated or expected to buy the goods, but a consignee must:

• Pay the consignor when the goods are sold, or

• Return the goods to the consignor on demand

Consignment sales may stimulate volume, since they enable a company to place goods on the premises of firms that might not otherwise be able to stock them. Usually, there is no fee for placing items on consignment. Instead, a commission is charged when the item sells. This commission or markup is the consignee's profit on the sale. There are several problems associated with consignment sales, including:

• The consignor cannot record consignments as sales.

• A consignee does not have the same motivation to "move" the merchandise as it would if it owned the inventory, and as a result there can be significant delays between the time the goods are delivered to the consignee and their sale.

• There is always a risk that the consignee will sell the merchandise and never pay the consignor.

• There may be a dispute as to which party is responsible for shrinkage or theft of the consigned inventory.

• The consignor's standard property insurance policy may not offer any coverage for consigned inventory.

• One of the more common problems is that unless the consignor inspects the consigned inventory regularly, the consignee may make a sale and not report it immediately in order to get the "float" associated with holding onto the consignor's payment.

• If the consigned items are withdrawn from consignment sale, the consignor is responsible for the shipping and handling costs of returning the merchandise

• In some cases, if merchandise is withdrawn the consignor is contractually obligated to pay a withdrawal fee to the consignee.

One final area of concern involves a situation in which a secured creditor [such as the consignee's bank] seizes the assets of the consignee - including the consigned inventory. The Uniform Commercial Code provides a mechanism for establishing a valid security interest in consigned inventory that typically works this way:

• An agreement is drafted and signed describing the relationship of the parties involved (i.e., the shipper/seller as the consignor, and the recipient of the consigned goods as the consignee)

• The agreement includes a description of the inventory;

• There is an agreement that title to the merchandise can only pass to third-party buyers;

• The consignor/seller completes a UCC-1 financing statement, which again describes the inventory and states that the inventory is delivered on consignment;

• The consignee signs the UCC-1 and returns it to the consignor

• The consignor then files the financing statement with the appropriate filing office (usually the Secretary of State).

Note: As with any UCC filing, errors made in the filing process may result in the creditor's security interest being invalid.

© 2001 All Rights Reserved