Running a Consignment Business

This is a discussion regarding consignment businesses–types of consignment businesses, advantages, disadvantages, and opportunities.

There is a good chance that you have patronized at least one consignment business in your life. Consignment businesses are stores that sell items that they have not yet paid for. The store owners contract with suppliers (usually small business people in the area) to display products in the store for sale to the public. The supplier is only paid if and when the store sells an item to a customer.

Advantages of a Consignment Arrangement

The advantages of consignment arrangements are mostly one sided in favor of the consignment shop. Consignment businesses can display and sell items without ever having to make an upfront investment related to stock; they only pay rent and overhead. Consignment business owners are basically go-betweens, connecting artists and small manufacturers with the public. The most popular consignment shops you will find usually sell artwork, clothing, and other small trinkets.

The plus for consignment shop suppliers is that they finally have a venue to distribute their products. This is an ideal situation for business people who do not have a storefront, such as a furniture maker who manufactures products from home or an individual looking to unload used items of value.

Challenges and Payment Concerns

The process of setting up a consignment arrangement seems pretty basic, but there are some downsides and challenges. The biggest issue that consignment businesses have to manage is how to pay their suppliers once the products are sold.

The shop and supplier will agree upon a fair split, usually about 60/40 in favor of the supplier/artist. A meticulous consignment shop owner will call a supplier immediately after an item is sold to tell him to come pick up his check. This makes for better accounting and is a common practice for consignment businesses who work with more expensive items, such as artwork.

On the other hand, many consignment shop owners are not as consistent with their bookkeeping and won’t call their suppliers regarding payment. Instead, the supplier will have to call constantly to check on her products. This process can create potential problems for both sides.

For one, there is an increased possibility that there will be discrepancies and disagreements between the shop owner and the supplier as time goes along. Suppliers can become increasingly mistrustful of the shop owner when they go months and even years without receiving proper payment. It is also sometimes difficult to end a consignment arrangement.

For a consignment business, the customers are number one, but the suppliers are a very close second, so the best practice when operating a consignment shop is to maintain very regular communications with suppliers and pay them promptly.

Online Consignment Businesses

With the growth of the wildly popular web auction site Ebay, there has been an explosion in online consignment businesses, sometimes called drop off stores. Many brick and mortar consignment shops are set up with the sole intention of selling the products people bring in on Ebay and other online sites. The overhead costs are minimal and online consignment shop owners can sell the consigned items from the comfort of their home offices.

Are Consignment Businesses Viable?

It seems that nowadays, due to increasing costs across the board, setting up a consignment business is only practical when the sales are being made online. More and more customers are choosing to forgo the physical shopping experience and buy their items online to find the best deals possible. In addition, rents in popular shopping districts are sometimes prohibitive for new business owners.

If you are thinking about starting your own consignment business and want to learn more about the advantages and challenges, the best thing you can do is gather as much information as possible from existing business owners.

Ask your local shop owners about their business model and browse online forums to read what other online and brick and mortar consignment business owners are experiencing. Setting up a consignment shop may seem easy, but just as with any other business idea, you need to be 100% positive that you’re fit for the task.

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