Determining Basic Inventory Eligibility Exclusions in Revolving Facilities
Inventory exclusions protect revolving lenders by eliminating unmarketable, encumbered, or unverified stock from the borrowing base before advance rates apply.
Consigned Goods
Meaning
Physical merchandise held by one party while ownership remains with another until a sale or transfer occurs. These consigned goods sit on the balance sheet of the consignor despite being physically located at the premises of the consignee. The arrangement ends when the item sells or the owner recalls the merchandise.
Inventory Risk
Risks involving physical damage or loss typically remain with the owner unless a contractual shift occurs at the point of delivery. While the consignee provides floor space and sales effort, the consignor maintains the financial burden of unsold stock. A failure to sell within the agreed period results in the return of the units, which often incurs shipping costs and potential depreciation.
Operational Custody
Responsibility for the care and insurance of the items falls to the holder during the period of possession. Even though consigned goods are available for immediate delivery to customers, they do not count as assets for the holder’s bank audit. This separation ensures that the legal title stays clear for the original supplier until the final transaction triggers a title transfer.
Settlement Cycle
Payment occurs only after the sale is confirmed or a specific holding period passes. The consignor receives a report of sales and issues an invoice to close the transaction. This mechanism allows a supplier to test a new market without the buyer taking on the full risk of unsold units.