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Brief Introduction to Consignment Sales
By Steven Kozack

Business Credit Concepts
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Occasionally, a credit manager will be asked for his or her opinion about a customer's request/suggestion that goods should be delivered to them under a consignment agreement rather than as a sale. In certain industries, consignment transactions are common. In others, consignments are rarely if ever used.

Many credit managers know very little about the consignment process. This introduction is intended as primer - not a comprehensive review of everything the credit department needs to know about consignments.

Here are some important points to remember:

  • Delivery of goods on consignment is not a sale. It does not involve the transfer of title and ownership of the consigned merchandise, or an obligation on the part of the recipient to pay for goods that were delivered but remain unsold.

  • Inventory on consignment may become the subject of a secured creditor's claim [it may be seized by a secured creditor] unless the consignor perfects a security interest in the consigned merchandise.

  • The owner of the merchandise [the consignor] is normally responsible for loss, shrinkage, or damage of its merchandise while in the control and custody of the consignee.

  • A serious problem with consignments is the fact that the consignee does not have the same pressure to sell the merchandise in question as it would if it owned the product. Whatever remains unsold can be returned to the consignor... usually at the consignor's expense.

  • The possibility exists that a consignee will sell "your" merchandise but fail to send payment when these sales are made.

  • Another risk is that the consignment merchandise will be sold and the consignee will either file for bankruptcy protection, or disappear with the proceeds.

Credit managers faced with the possibility of a consignment "sale" must exercise caution, and recognize that accounting for what was sold and what eventually is returned as un-sellable is often a significant challenge for creditor companies not used to shipping goods on consignment terms.

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