Consignment UCC Filings and Open Credit in the Foodservice, Beverage & Hospitality Industries
Statistic Brain reports that only 47% of retail entities are still in business after their 4th year. And grocery stores sit in the #3 spot of businesses with the worst rate of success after a 5th year. This high rate of failure is driven by many factors including poor business planning, poor credit granting practices, inadequate inventory and unfamiliarity with suppliers.
Because the risk of failure is so prevalent in the food, beverage and hospitality industries, creditors must actively and aggressively implement UCC filings for security. Creditors often include security language within their credit applications and establish standard business practices by always obtaining a signed Security Agreement, because UCCs work.
UCCs are a basic risk mitigation tool; they are a low-cost solution, requiring nothing more than a signature from the customer. Let’s take a look at how consignment filings can reduce your risk in scan-based trading.
Consignment Filings — Scan-Based Trading
There are two type of consignment:
- “Sale or Return” where goods are delivered to the consignee primarily for retail purposes. In this type of consignment, title passes to the consignee upon delivery, but the consignee remains contractually obligated to return any unused goods.
- “True Consignment” where the goods are delivered to be primarily used by the consignee, but consignor retains title to the goods. Consignee may either be pulling goods from stock on an as needed basis, or might be testing out goods on a trial basis to determine the necessity of the goods.
How Does a True Consignment Work?
The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If/When those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner.
This falls right in to scan-based trading. Grocery stores are a great example of scan-based trading. A creditor provides a grocery store with an inventory of goods. Until those goods are scanned at the counter, the title to those goods remains with the creditor. Once the goods have been scanned/sold, the creditor records the sale and the sold goods leave the inventory.
But, to maintain title to those goods, you must perfect a security interest via a UCC filing. NCS’ Jerry Bailey comments on how Article 9 changed consignment sales.
“Article 9 changed consignments and it basically said, ‘look, that stuff belongs to you, you and your debtor both know that, but nobody else does because there’s no public registration, and that’s not right.’ They call these secret liens because the goods belong to you, but nobody else knows that.
Potential lenders should be able to do a search and see what’s there and who it belongs to. So, they said from now on if you’re selling under consignment, there should be a public registration.
There had been instances where banks came in to a business, saw all the inventory and decided they would factor this inventory into their risk analysis and lend based on the inclusion of that inventory. Unfortunately, they didn’t realize that of the $1 million worth of inventory they looked at, $300,000 of it was consigned goods and belonged to creditors, so it shouldn’t have been factored into the lending.”
Keep in mind, consignment filings may not be the best fit for your business. Creditors supplying to food, beverage and hospitality industries also use Blanket Filings, PMSI in Inventory or Equipment Filings and even Fixture Filings. We’ll discuss the applicability of these other filing types in upcoming blog posts.