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What is a Consignment Agreement?
According to Investopedia, consignment became popular during the 21st century. Why? Simply because millennials choose to be thrifty shoppers. Instead of purchasing goods in expensive stores, millennials pick and obtain different kinds of merchandise from small retail stores. Economists believe that this is the outcome of the 2007-2009 “Great Recession” and the reality of increasing debts and stagnant salaries. Consignment is a deal where goods are entrusted to another for selling, and a consignment agreement is a contract where a seller permits another person to display his/her products for sale. Typically, consignment shops are more affordable compared to high-end shops. Also, these shops are cheaper because consignment is an agreement that doesn’t require stores to buy the items they are going to sell.
All You Need to Know About Consignment
As explained briefly above, consignment is a simple business system where a seller leaves his/her goods in a shop up until a buyer decides to purchase the item/s he/she sells. The consignor, who is the seller, owns the product/s until they sell. Moreover, the consignee is bound to an agreement with the consignor to share the profit gained from sales. With that said, here are some additional information concerning consignment:
How to Make a Consignment Agreement Template
In the U.S., consignment contracts are under the control of Uniform Commercial Code(UCC) laws—specifically Article 9. This section of the UCC was primarily made for resolving debts, but in 2002 a revision was made, and its coverage started to incorporate business inventories. A consignor or a consignee can make a consignment agreement, and it will help both of them to understand their roles in the business by listing their expectations before they begin. The following are the steps in making a standard consignment agreement:
Step 1: Type in the Date of Effectivity and Basic Information of Both Parties
Remember that consignment agreements only last for some time, depending on the arrangement. Therefore, the date both parties have signed the contract is fundamental. Writing the correct and complete names and addresses of both parties is also essential for identification. Lastly, the state where both parties reside is part of that as well because different states have different laws.
Step 2: Include Recitals
Recitals serve as preparatory statements that lay out the intentions of both parties and express the purpose of the contract. They are used to explain the nature of the agreement. Note that they are not a list of the rights and responsibilities of both parties. Moreover, in this part of the agreement, both parties express their acceptance of the terms and conditions.
Step 3: Write the Conditions of the Agreement
It should be plain to both the consignee and consignor what their conditions are while doing business. For example, Mike is selling artworks for a living. He then agrees with a coffee shop owner to display his creations through consignment. As long as the artworks remain unpurchased, Mike will still be the owner of the product, yet he grants the coffee shop owner the right to sell his artworks. Also, Mike may give the owner the exclusive right to sell his artworks.
Step 4: Remember to Include the Fees and Payment
This section of the agreement is one of the main reasons why the contract is made in the first place. It is the job of the consignee to determine the payment price of the product/s he/she is going to sell. Let us refer to our previous example—After successfully selling an artwork, the consignee should send the profit, minus the agreed percentage he/she is entitled to, to Mike. The consignee keeps a record of sales to keep Mike updated with the inventory.
Step 5: Incorporate Other Necessary Stipulations
Stipulations concerning damage and loss, taxes, indemnification, and termination should be explained in detail in the contract. (1) A consignee will be liable for any damage or loss before a product is sold. (2) A consignor is not responsible for paying the business taxes of a consignee. (3) One party may indemnify the other party against liabilities that are not a result of negligence. (4) Termination can happen anytime when one party fails to meet the conditions the contract is requiring.
Step 6: Don’t Neglect General Provisions
The governing law enforces an agreement depending on which state both the consignee and consignor belong. Regarding disputes, both parties may agree to settle future disagreements with the help of an arbitrator from the American Arbitration Association. In that case, both parties no longer have the right to bring the matter to court in honor of arbitration. Furthermore, revisions of the document can be done with the consent of both parties.
How much should the consignment rate be?
Consignment rates may differ from store to store, but the usual split is 60% for the consignor and 40% for the consignee. Though this is the common practice, you can negotiate and agree with a consignee for a 70/30 split. However, some stores may also ask for a 50/50 split. Therefore, it depends on how a consignor negotiates with a consignee to his/her advantage.
Does a consignee pay for sales tax?
It is the consignment store’s primary duty to sell the items of the consignor, but they are not accountable for any sales tax since they do not buy the products they sell under consignment. Consignment shops receive commissions as their income, so when a product sells, the shop keeps a specific percentage and gives the rest to the seller. Therefore, the shop will only report his part of the sale in his/her taxes.
What is the average income of a consignment shop owner?
According to Simply Hired, the average income of a consignment shop owner is $42,000. But this estimation may vary from place to place, depending on the location of a store. The Bureau of Labor Statistics reported that the earning of a retail clothing manager is about $30 per hour.
Where can you best sell your products for consignment?
The following are some stores where you could best sell your products for consignment: (1) Poshmark is a fast-growing company widely known in the U.S. for selling products online, specifically accessories and clothing. (2) eBay is practical if you want to sell your clothing items outside the country, but you have to learn how to compete with other sellers on the platform. (3) Tradesy is known to be one of the greatest competitors in the consignment world. They sell clothing, shoes, bags, pieces of jewelry, and more. (4) Plato’s Closet is distinct from the other consignment shops because they pay for your items immediately. They have many stores all over Canada and the U.S. (5) The RealReal pays a maximum of 85% of your product’s under consignment, and they have stores in about 20 big cities.
Do consignment stores sell used items?
Yes, some consignment stores accept gently used items that are resaleable, but remember that these stores only pay until your items sell. Make sure the items you sell look as good as new as much as possible. If you want to sell clothes, then check the zippers, buttons, and even the presence of stains. Sell presentable items.
If you are a businessman who wants to take every opportunity to make your product known, consignment is one way to go. The process of consignment may look easy, but a consignor must understand that he/she is not the only one involved. There are a lot of competitors out there who can be as passionate as you are in selling an item. One must learn to strategize. On the other hand, if you are a resale shop owner, never get into an arrangement with a consignor without an agreement or contract. Proper management of the items you receive from a consignor is essential for trouble-free transactions. Therefore, anyone who is involved in consignment is bound to use a consignment agreement, that is a given.