Meaning
Mandatory communication sent by a supplier to existing lenders of a merchant ensures that the supplier’s interest in consigned goods takes priority. This consignment notification must reach every creditor who holds a security interest in the merchant’s inventory before the goods are delivered. It informs the lenders that the supplier intends to place inventory on the premises without transferring ownership.
The process is a requirement under the uniform commercial code for protecting assets in a retail setting.
Notice Period
Delivery of the goods can only occur after the lenders have received the required information. This consignment notification remains effective for five years, covering all subsequent shipments during that time. If the relationship continues beyond this period, a new round of notices must be sent.
Inventory Detail
Documentation must describe the type of goods being provided with enough specificity for a creditor to identify them. A generic description like all inventory is usually insufficient for a consignment notification. The goal is to ensure that a bank knows exactly which items on the floor do not belong to the merchant.
Priority Status
Sending these letters prevents the merchant’s existing creditors from claiming the consigned items as their own collateral. Without a consignment notification, the supplier’s interest is subordinated to the interests of banks that have already filed liens. This priority is essential for suppliers who do not want to lose their property in the event of a merchant’s bankruptcy.
It allows manufacturers to ship high-value items to small retailers who might otherwise lack the credit to purchase them. Suppliers rely on this protection to expand their distribution networks safely.
