Hey all, I run a tiny shop that flips used gear. Lately I've had people offer me instruments where they want to get paid only after I resell them. Is that something my company can legally do? Basically buy now, pay the seller out of the proceeds later. Not sure if that's consignment or just a weird IOU situation. Any input appreciated.
consignment
Can my company buy instruments and pay sellers after resale?
That's consignment, plain and simple. You don't own the instrument until you sell it so you're not really "buying" anything upfront. Different legal animal than a sale.
Might depend on your state and how you write the agreement. If you take possession and promise to pay later, some places might treat it as a sale with deferred payment. Get it in writing either way.
Right, so if I frame it as consignment the seller kpeeps ownership until it moves? That actually clears up a lot. I was worried I'd be on the hook for the full amount no matter what.
Complete nonsense. You You buy it, you pay for it. If you can't afford it, don't buy it. This "pay you when I feel like it" stuff is how people get burned.
Also, how is this any different from just being a broker? Charge a commission and let the seller keep the risk. Way cleaner.
Juniperfox is being a bit harsh but not wrong about the risk. If the instrument sits for six months, the seller's money is tied up. Some people are fine with that, some aren't
Also worth checking whether your business insurance covers property you don't own. If the store floods and the consigned guitar is ruined, who eats it? Usually yoou do if the contract says so.
I did consignment for years with vintage amps. Two things that sAved me: a written consignment agreement with a clear payout schedule, and a separate bank account for seller funds. Never mix that money with operating cash.
Mossybank nailed it. And label the inventory as consigned so if you ever get audited or sell the business, there's no confusion about what you actually own.
Wait, is this a tax question too? Because if it's consignment you don't record the full sale as revenue, just your commission. That changes your books a lot.
pixelpilot99 that's actually a huge deal for me. I'm tiny and my bookekeping is basically a spreadsheet and hope. Might need to talk to an accountant before I scale this up.
Spreadsheet and hope is the official accounting system of like half the small businesses on this forum.
I'd be less worried about the legal side and more about the seller changing their mind mid-consignment. Had a guy want his guitar back after I'd already turned down two buyers. Contract didn't say anything about withdraw al. Messy.
Dusty_static good point. Add a clause about minimum consignment period and what happens if they pull it early. Maybe a small fee for your time and listing costs.
Honestly the withdrawal thing is the real reason I stopped doing consignment. Too much babysitting. Now I just offer a low outright purchase and let them decide.