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What Are Goods on Consignment?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 September 2016
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Goods on consignment is a type of selling arrangement in which the seller agrees to forward the goods to a buyer, with the understanding that payment for those goods will be received when the buyer is able to sell them to his or her customers. In the interim, the seller continues to function as the legal owner of the goods, and has the option to request that the items be returned. Typically, the agreement between the two parties will call for the goods held on consignment to remain in the possession of the buyer for a specified period of time, allowing the buyer the opportunity to sell the goods and settle with the seller.

One of the easiest ways to understand how a goods on consignment arrangement works is to consider a seller who has a lot of 100 dresses for sale. The owner of a dress shop offers to buy the goods on consignment, agreeing to pay a fixed amount for each dress in the lot. The contract on the consigned goods allows the owner a period of six months from the start date of the contract or the date of delivery to display the dresses in the shop, sell them, and tender payment for the dresses. At the end of the six months, the owner provides payment for every dress sold and makes arrangements to return any unsold dresses for credit.

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In order to make the goods on consignment arrangement work, the dress shop owner will set the retail price for each dress at an amount sufficient to cover the unit price plus any other expenses, such as the cost of shipment to the store. Records are carefully kept so the owner always knows how many of the dresses remain in inventory. This makes it possible to always advise the seller of the current status of the lot, making it easier to adjust the amount of payment that can reasonably be expected at the end of the contract period, as well as the amount of returns that may occur.

There are a number of benefits associated with a goods on consignment arrangement. Buyers have the chance to acquire the goods up front, paying nothing or only a small amount to the seller as a show of good faith. Assuming the goods can be sold within the time frame specified in the purchase agreement, the buyer can easily set aside enough to pay for the order while also enjoying immediate access to the profits. Sellers benefit from being able to arrange a sales that is likely to produce revenue by a specific date in the future, which can be very helpful in planning for future expenditures.

A goods on consignment deal can include just about any type of goods, ranging from housewares to clothing to vehicles. As long as the details of the purchase agreement allow the buyer sufficient time to resell the purchased goods and the seller gets a price that is considered equitable for the items included in the purchase, the arrangement can be very lucrative for everyone concerned. Care must be taken to negotiate terms that do not impose any particular hardship on either party, since that could create issues for the current deal as well as preclude the opportunity to continue doing business in the future.

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