Is supplying goods on credit a good idea? - Kensington Swan
In effect, franchisors who supply goods become a source of credit for the franchisee. This is contrary to the concept of using franchising as a means of freeing up a franchisor’s capital but it is an accepted fact of franchising.
It is important that a franchisor, having provided credit to a franchisee, put in place systems and agreements to ensure and protect itself against any non-payment for goods by a franchisee. Otherwise a franchisor risks losing stock supplied and non-recovery of debts if a franchisee faces financial collapse, receivership and/or liquidation.
The Personal Property Securities Act (PPSA) allows suppliers of goods on credit to have a security interest in the goods supplied and the sale proceeds.
This interest can be registered on the Personal Property Security Register (PPSR) and when registered, is notice to everyone of the franchisor’s security interest in the goods and sale proceeds.
Because a franchisor is supplying goods on credit under the PPSA, the franchisor has a purchase money security interest in the goods. When registered, this interest gives the franchisor rights in the goods and proceeds and priority over other secured creditors such as banks. This is a very important and a useful right to all suppliers, not just franchisors.
By being able to act under the security interest when registered, the franchisor will be better able to control recovery of goods and sale proceeds if anything does go wrong.
A security interest under the PPSA and its registration does not just happen. A franchisor needs an agreement with the franchisee which records the supply of goods on credit and that a security interest has been created in the goods and sale proceeds and will be registered on the PPSR. This is usually done through a set of terms and conditions of sale included in any invoice and delivery docket, which are accepted by the franchisee as part of the franchise agreement.
The security interest must be registered on the PPSR by filing online a financing statement.
The process to achieve security for current account credit is relatively simple and cost-effective. Once in place, a franchisor will be better able to protect credit extended to a franchisee and so benefit the franchisor.
Our Franchise Lawyers at Kensington Swan provide franchisors with practical and commercially focused advice. So we provide you with ideas in a proactive way, we work hard first and foremost, to understand your businesses.
29.07.2008
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