Factoring Companies Guidebook
Consignment Stock
Goods provided to the debtor for which payment is only required once they have been sold on i.e. no outright sale has taken place. This generally requires some accounting by the debtor to the Client for stock held, but the Client's staff can carry this out.
Consignment Stock can also be received by the Client from its supplier.
Concerns
If properly accounted for this can be a very secure type of debt for us, in that the invoices arise from an acknowledgement from the debtor of goods sold and therefore payable. In some cases the Client may invoice on delivery and this would not represent a valid debt. It is also not unknown for a Client to raise further funding by then submitting a second invoice on acknowledgement of the sale from the customer; thus we would be funding the same goods twice. While a credit note may be issued, the timing of that credit note in relation to the second invoice is critical even accepting that the first invoice raised on the customer was invalid. We are also unlikely that the confirmation of items actually sold by the customer, will exactly match the number of items delivered and therefore any credit note is unlikely to cancel the original invoice in full. As well as our potential exposure to double funding, it is also exposed to in effect 'granting' extended credit if the debt is not settled within the normal 90 day funding period. We could be funding from delivery through acknowledgement (e.g. 60 day elapsed period) to final payment, (which may be further 60 days after the invoice is raised on acknowledgement).
Identification
Enquire with the Client whether they sell any goods on a consignment basis or any of their suppliers provide materials on a consignment basis. Review orders and invoices for evidence of this type of sale and consider the nature of the business, e.g. this is common in the publishing industry.
Treatment
Where a Client raises invoices on delivery a reserve/disapproval for the full value of the resultant debt should be set up. It may be prudent to exclude the debtors concerned from the facility as soon as possible and certainly where no reliance can be placed on the Client's own internal systems and controls.
A Client or Prospect with high levels of Consignment Stock from suppliers is unsuitable for a factoring facility unless a waiver over title of the goods once sold (as opposed to once paid for) is available from the supplier.
