How Does The Typical Consignment Process Work?
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Overview
Selling on Consignment
- Place inventory with reseller.
- Execute a consignment agreement.
- Items are sold.
- The reseller receives a share of the sale proceeds (commission).
- The property owner is paid.
- Unsold items are returned to the owner.
How Does It Work?
Providers of goods (consignors) place (consign) inventory with resellers (consignees) who sell the consigned items for a share of the sales proceeds.
An example is a consignment shop or online business which resells used clothing:
- Consignors deliver articles of clothing to the consignee's place of business and place them 'on consignment'.
- The reseller rejects any item that may not be suitable1 for resale.
- The two parties enter into a (written) 'consignment agreement' which defines risks, responsibilities, and the relationship.
- The items are placed into inventory and displayed for sale.
- Typically at the end of the month, the consignee 'settles' with the consignor by paying a stipulated percentage of the sales proceeds.
- At the end of a designated period of time (the 'holding period'), unsold items are either returned to the consignor, destroyed, or donated to shop ownership or charity.
Inventory on Consignment for Business Consumption
Providers of inventory might place items on consignment with businesses which will consume the inventory. For example, a producer of garden seeds might make bulk quantities of seeds available to a farmer who grows and resells vegetable produce. The producer uses as much as is needed, pays for the used inventory, and returns the excess to the wholesaler.
The Consignment Agreement
A written agreement between the consignor and consignee defines the relationship, risks, and responsibilities of both parties. Elements of a common consignment agreement are:
- The names and contact information of the parties
- The date of execution
- The consigned items
- The percentage of sales proceeds to be paid to the owner (consignment %)
- The consignment or holding period
- Suggested selling prices (optional)
- Lowest acceptable prices (optional)
- Disposition of 'aged (unsold) inventory'
- Expenses to be borne by either party
- Actions to be performed by both parties
- Provisions for lost/stolen merchandise
Settlement
Periodically, consignors are paid by consignees for sold goods through the process of settlement.
The common practice is to settle with consignors for items that sold in the month prior to the month currently ending. For example, at the end of May, settlements would be processed for items sold in April, with settlement documents and payments delivered in the first week of June. The 'lag time' allows for unforeseen events like returns of purchases.
In BTB (business to business) relationships and situations involving large-ticket items, settlement may be required in real time when the product is sold. Another arrangement is for the payment of a previous order when a new order is made.
Settlements might include 'adjustments' or deductions from settlement proceeds, like expenses for repairs, cleaning, credit-card-processing fees, mall rent, etc.
Payments for sold goods are routinely accompanied with written documentation itemizing data like dates sold, items sold, prices received, percentage payout, etc.
Resale (Buy Outright, BOR)
The act of consignment is different from purchasing inventory from individuals, wholesalers, and other businesses where payment is made upon delivery of merchandise and which becomes the property of store owners. In the consignment world, this process is often referred to as 'buy outright', abbreviated 'BOR'.
Retail
Also not to be confused with consignment is 'retail', which is similar to buy outright. Retail differs in that purchases are made of new merchandise, often from wholesalers and suppliers.
Payment Processing
Consignment selling online offers a great opportunity, especially with the rise of self-employment and online businesses. However, competition has increased, making it essential to establish a strong online presence through social media or by leveraging established platforms like eBay, Shopify, and Amazon. Securing reliable credit card processing is also crucial; while getting a merchant account can be challenging and expensive, services like PayPal and Square offer more accessible alternatives, allowing sellers to process payments easily, helping them start their online businesses smoothly.
Summary
Businesses selling to the public can engage in all three types of selling (consignment, buy outright, and retail) and might be wise to do so.
- Consignment is a great way to fill store shelves with inventory with no inventory cost.
- Buy outright may be a better way of increasing profit by purchasing more 'saleable' items at low prices with more profitable markups.
- Retail adds new (unused) stock which can add to aesthetics and maximize revenue from floor traffic.
Software Reviews
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1 Suitable: Consignment businesses often have limited space and strive to accept only those items that are most likely to sell quickly and at a fair price. Store owners typically only take in things that are relevant, in good condition, and in style.
Frequently Asked Questions
How does the consignment process work?
In a consignment arrangement, a consignor brings items to a resale shop (the consignee), which sells them on the consignor's behalf. When an item sells, the shop keeps a commission and pays the remaining proceeds to the consignor. Unsold items are returned, donated, or disposed of after a set holding period — typically 60 to 90 days.
What is a consignment agreement and what should it include?
A consignment agreement is a written contract between the consignor and the shop that defines commission rates, the holding period, what happens to unsold items, pricing authority, and liability for lost or damaged goods. A well-written agreement prevents disputes and sets clear expectations for both parties.
How are consignors paid in the consignment process?
Consignors are paid through a process called settlement, typically once a month. The shop calculates what sold, deducts its commission, and pays the balance to the consignor by check, store credit, or electronic transfer. Resell4.me automates this process — generating settlement documents and tracking each consignor's account balance in real time.
What is the difference between consignment, buy-outright, and retail?
Consignment means selling goods for a commission while the consignor retains ownership until the item sells. Buy-outright means purchasing items from sellers upfront, making the shop the owner. Retail means purchasing new goods from suppliers. Many shops use all three models together — Resell4.me supports all three in a single system.
How much does software for managing the consignment process cost?
Resell4.me starts at $49/month (Essentials) or $1,470 one-time, and $89/month (Professional) or $2,670 one-time. It automates intake, inventory tracking, sales, and consignor settlements — eliminating the manual spreadsheets and paper records that slow down the daily consignment process. No long-term contract required.
Run Your Shop on Resell4.me
Cloud-based consignment software from $49/mo. Talk-and-touch inventory and automatic consignor settlements on any device, with an online consignor portal on the Professional plan. Free data migration, month-to-month, cancel any time.