Consignment arrangements can be a good way for a small maker or brand to get shelf space without a retailer taking on inventory risk, but the informal handshake version of this deal — drop off product, get paid when it sells, pick up what doesn't — leaves the supplier exposed in ways that only become obvious when something goes wrong. A written consignment agreement isn't about distrust of the retailer; it's about making sure both sides have the same understanding of who owns the goods, who's liable if they're damaged, and what happens if the retailer closes.
Establish Who Legally Owns the Goods Until They Sell
In a true consignment arrangement, the supplier retains ownership of the goods until they're sold to an end customer, while the retailer merely holds and displays them. This distinction matters enormously if the retailer goes bankrupt: consigned goods that are properly documented as such may be excluded from the retailer's bankruptcy estate, while goods that look like a standard sale to creditors could be swept in and lost. Get this ownership structure explicitly stated in writing, and understand your state's UCC filing requirements for consignment to protect this status.
File a UCC-1 Financing Statement Where Required
Many states require consignors to file a UCC-1 financing statement to protect their ownership claim against the retailer's other creditors, particularly if the retailer's other financing arrangements (like a line of credit secured by inventory) could otherwise treat your consigned goods as available collateral. This is a relatively simple filing, but skipping it can mean losing your goods entirely if the retailer defaults on other obligations.
Define the Payment Terms and Timing Clearly
Specify exactly when payment is due after a sale — some agreements pay out immediately per sale, others settle on a monthly cycle — and what commission or split percentage applies. Vague terms like "paid when sold" invite disputes about timing and reporting; put a specific schedule and reporting cadence in writing instead.
Require Regular Sales and Inventory Reporting
Without regular reporting, you have no independent way to verify how much of your product actually sold versus what's sitting on the shelf, which makes both payment disputes and inventory reconciliation difficult. Require the retailer to provide a sales and inventory report on a set schedule, and reserve the right to conduct your own physical count periodically.
Address Damage, Loss, and Theft Explicitly
Decide upfront who bears the cost if consigned goods are damaged, stolen, or lost while in the retailer's possession, and whether the retailer's insurance covers consigned inventory or only goods they own outright. Many retail insurance policies don't automatically cover consigned goods, so this gap needs to be addressed directly rather than assumed.
Set Clear Terms for Unsold Inventory and Termination
Specify how long goods can sit before either party can request their return, who pays return shipping, and what condition returned goods need to be in. Also define how either party can terminate the arrangement and what happens to inventory already in the store when that happens, so a relationship ending doesn't turn into a dispute over the last shipment.
Clarify Pricing Control and Markdown Rights
Decide whether the retailer can discount your goods without your approval, and if so, how that affects your payout — a markdown that isn't addressed in the agreement can quietly cut into margins you didn't expect to lose. Some agreements require supplier approval for markdowns beyond a certain threshold; others give the retailer full pricing discretion in exchange for a different commission split.
Consignment can be a genuinely useful way to get into new retail locations without the working capital hit of a wholesale purchase order, but only when the terms are specific enough to protect the goods, the payment, and both parties' expectations if the relationship doesn't work out. A short written agreement covering these points is worth far more than the handshake version once real money and inventory are involved.
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