| Merchandise Trust ® |
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Financing Undercapitalized Retailers With Inventory: Trade suppliers in niche industries regularly face an all too common problem, undercapitalization among its retail accounts. As a supplier your distribution channels are limited and you certainly can not afford to lose any of them. But can you ship product to a retailer who is already overextended in credit? There is a way you can maintain those valuable distribution channels without further exposing your company to a serious loss, even bankruptcy. It is called the “Merchandise Trust Program ®” Here is how we make it work: 1. The supplier, the retailer and our firm, acting as a special third party agent execute a series of legal documents and forms that establish the program. One of those documents creates a legal trust for the benefit of the supplier. We, as special agents, act as trustee for this trust. 2. Certain supplier product is specially identified as “Trust Inventory” and shipped to the retailer. (The identity of the Trust Inventory is invisible to the customer). On a daily or weekly basis, all proceeds from the sales of the trust Inventory (including the retailer’s profit) are placed into a special bank account owned by the trust. On a weekly basis, the trustee distributes from this trust account, in order of priority: (a) the amount owed to the supplier for the sold products and (b) the retailer’s profit less (i) certain fees and expenses associated with the implementation and management of the Program and (ii) a specified reserve. 3. As Trust Inventory is sold, more inventories can be shipped (at the supplier’s discretion), and the process repeats itself until: (a) the retailer has re-established his credit with the supplier or (b) the supplier unilaterally chooses to terminate the Program.
The program works for two important reasons. First, the legal documents signed in connection with the Program ensure that the supplier retains legal title to the Trust Inventory at all times. Only when a sale is made does title pass to the consumer, and at that time, legal title to the sale proceeds passes directly to the supplier. These proceeds are held “in trust” for the benefit of the supplier, reconciled in the trust account, then ultimately paid to the supplier. At no point in the process does the retailer get title to the Trust Inventory or its proceeds. So, in a bankruptcy scenario, the Trust Inventory at the retailer’s place(s) of business, including any proceeds of the Trust Inventory sales, are excluded from the bankruptcy estate and are therefore recoverable by the supplier. The “identifiability” of the Trust Inventory as distinct from the retailer’s other inventory is of critical importance to the program. Typically, the retailer’s primary lender has a blanket lien on all of the retailer’s assets, including its inventory. Under normal circumstances, a supplier who ships product to a retailer who then files bankruptcy, has, in essence, provided the bank with additional collateral to secure its loan. But, with the “Merchandise Trust Program ®” properly implemented, the supplier keeps its products out of the bankrupt estate of the retailer. The supplier can recover its merchandise and ship it to other retailers. Furthermore, the retailer’s bank will quickly recognize that this additional inventory, even if it does not become a part of the bank’s collateral, will assist in keeping its borrower out of bankruptcy and on the road to financial recovery. The second reason the Merchandise Trust Program® works is because, in addition to our duties as trustee, our firm acts as a “watchdog” for the supplier. We reconcile shipments, inventories and sales, perform inventory audits, and provide periodic reports to the supplier. If there is ever a shortage, discrepancy or other problem, we are there to address it. At the same time, we may also assist the retailer with sales efforts and provide professional retail guidance, marketing and consulting advice.
The Merchandise Trust Program® is extremely flexible. It can be used in virtually any retail business as well as service or other related industry. It can be used as a temporary method of reestablishing credit, or as a permanent way of supplying retailers. In many cases, dividend paying life insurance can be purchased with a portion of the retailer’s profit as additional protection for the supplier and the cash value of the policy can be used as a source of collateral for future shipments on otherwise standard credit terms. Alternatively, reserve amounts can be used to pay suppliers for past due invoices while regular inventory orders continue to ship under the program. Any number of variations or alternatives for structuring are possible. |
