05.22 Distributor Financial Terms: Payment Terms, Minimum Commitment, Returns, and Credit
Governance metadata | Owner: Sales Lead | Last reviewed: 2026-10-22 | Next review: 2027-01-31
Network governance is in 05.03; this document provides the default negotiation package for "money and goods" together with credit management. Contract wording is subject to legal review.
1. Default Term Package (Negotiation Starting Point)
| Clause | Recommended Default | Adjustment Signal |
|---|---|---|
| First order | Prepay 30–50% or a letter of credit | Prior cooperation history can bring it down to 20% |
| Payment terms once stable | Net 30–60 | >60 requires a guarantee / collateral |
| Quarterly minimum commitment | Quantity written into the agreement | Missing it affects next quarter's quota (05.04) |
| Returns | Unconditional for quality issues; slow-moving stock capped at a B-Stock ratio | Align with 06.03 |
| Price | MAP compliance is a precondition for shipping | Violations suspend supply (05.04) |
| Exclusivity / territory | Make explicit whether it is exclusive | Exclusivity requires a higher minimum commitment |
2. Credit Management
New Distributor Onboarding
- Registration documents + beneficial-owner background
- Prepayment or a guarantee for the first order
- Credit limit = average monthly pickup × payment-terms coefficient (≤0.5 in the first quarter)
Overdue Escalation
| Overdue | Action |
|---|---|
| >0 | Automatic reconciliation reminder |
| >30 days | Stop new orders; escalate to finance |
| >60 days | Legal letter; assess a supply suspension |
| >90 days | Delisting assessment; inventory buy-back plan |
Reconciliation
- Monthly: align the four columns of shipments, collections, returns, and rebates
- Accuracy is reported into 01.13
3. Intersections with Price Control and Sell-Through
| Issue | Action |
|---|---|
| Price violation | Tier 3 breach under 05.04; can be offset against rebates |
| In-store Scan-down | See the default priority in 05.20: MAP takes priority online; the time-limited in-store exception must be filed |
| Slow-moving stock | Joint 05.20 rescue; MAP is never automatically broken |
| Excessively deep channel stuffing | Review whether the minimum commitment is inflated; guard against "fake shipments" |
4. Rebate Design (Default Structure)
| Type | Trigger | Settlement |
|---|---|---|
| Quarterly volume rebate | Reaching 100%/120% of the minimum commitment | Next-quarter discount or product credit |
| Early-payment rebate | Paid in full within the agreed Net terms | 1–2% |
| Market development fund | Vouchers for compliant displays / activities | Capped % to prevent cash-out abuse |
The blended rebate rate must flow into the channel P&L, to avoid an inflated "paper gross margin".
6. Related
05.03 / 05.04 / 05.20 / 06.03 / 07.07
7. Talking-Point Essentials for the First-Order Negotiation
- Prepayment is not "distrust"; it is "jointly validating sell-through"
- Tie the minimum commitment to the quota, to avoid the false prosperity of channel stuffing
- Write the cost of a MAP breach into the first-page summary, to avoid "small-print clause" disputes
8. Differences from KA (05.03)
| Distributor | Direct KA supply | |
|---|---|---|
| Payment terms | More common | Longer but more stable |
| Returns | Mainly B-Stock | Per the purchase agreement |
| Price | MAP | Purchase price + promotions |
Do not mix up the term templates.
9. Regional Distribution vs National Agency
| National agency | Regional distribution | |
|---|---|---|
| Coverage | Broad | Deep |
| Credit risk | Concentrated | Diversified |
| Price conflict | Likely | Relatively easy to segregate |
Recommended for year one: 1 main + N regions, to avoid being locked into a single national agent.
10. Contract Annex Checklist
[ ] Price list and MAP
[ ] Minimum commitment volumes and quotas
[ ] Returns and B-Stock rules
[ ] Rebate formula
[ ] Termination and inventory buy-back
11. Monthly Distribution Health Score (Recommended)
Credit overdue, sell-through, MAP violations, and collection accuracy → score across four dimensions; <60 stops new orders.
12. Payment Terms and the Cash Conversion Cycle (Example)
Production + ocean freight 45 days → inbound to warehouse → distributor payment terms Net 45 → cash collection
Cash tied up ≈ 90 days per cycle (without prepayment)
With 50% prepayment → about 68 days per cycle (illustrative)Compare with 07.07: the higher the distribution share, the more the peak depends on payment terms rather than on inventory alone.
13. Returns Handling SOP (Distribution)
| Type | Handling | Cost Attribution |
|---|---|---|
| Quality | Unconditional exchange / refund | Supplier / us, per the attribution rules in 03.07 |
| Slow-moving stock | Convert to B-Stock within a capped ratio | Discounted per 06.03 |
| Wrong shipment | Shipping borne by the responsible party | Per the contract |
Default B-Stock discount: per the residual-value table; verbal prices are prohibited.
14. Diversion and Payment-Term Interlock
| Behaviour | Finance Action |
|---|---|
| Low-price diversion confirmed | Suspend rebates + escalate as a MAP breach (05.04) |
| Cross-region dumping | Assess cancelling exclusivity + reduce the credit limit |
15. Distribution vs KA Cash Comparison
| Distribution Net45 | KA Net60–90 | |
|---|---|---|
| Collection speed | Medium | Slow |
| Order size | Medium | Large |
| Return terms | Relatively flexible | Fixed by the agreement |
| vs 07.07 | Moderate peak | Higher peak |
16. Negotiation Check (Before Signing)
[ ] Price list version number
[ ] Minimum commitment and quota formula
[ ] MAP annex
[ ] Return window days
[ ] Overdue interest rate / supply-suspension clause
[ ] Place of dispute resolution
[ ] Legal review completed
17. Monthly Health Score Breakdown
| Dimension | Weight | Algorithm (illustrative) |
|---|---|---|
| Collections | 40% | Overdue amount ratio |
| Sell-through | 30% | % of minimum commitment reached |
| MAP | 20% | Number of violations |
| Reconciliation | 10% | Number of discrepant items |
<60: stop new orders; <40: delisting assessment.
18. Price Protection Clauses
| Type | Default |
|---|---|
| Price change | 30 days' written notice; goods in transit at the old price |
| Promotions | At the channel's own cost or under a joint plan |
| Sudden tariffs | Negotiated separately; price protection is not assumed |
19. Distributor Training Pack
- Product one-pager
- Objection-handling scripts (align with 05.16)
- MAP red lines
- Returns process
No distributor may receive major-promo quota without completing the training.
20. With 05.17 B2B Gifting
The payment terms on gift orders may be shorter; custom items require ≥50% prepayment.
21. Termination Settlement Checklist
- Outstanding receivables
- Inventory buy-back formula
- Removal of exclusivity branding
- Handover of data and customer leads (per the contract)
23. Bad Debt Provision (Default)
| Overdue | Bad Debt Provision Rate (illustrative) |
|---|---|
| 0–30 | 0–5% |
| 31–60 | 20–50% |
| 61–90 | 50–80% |
| >90 | 100% |
Feed it into the finance receivables policy; keep it consistent with the 07.07 cash assumptions (high-overdue markets slow down collections).
24. Shipping Rules with 50% Prepayment on the First Order
- Funds received confirmed → production / allocation
- Balance-payment milestone: before shipping or after the bill of lading (the contract must fix one of the two)
- No pickup authorisation is released until the balance is paid
25. Anti-Cash-Out Protection for Rebates
- Rebates are paid mainly as product credit or a discount on the next order; cash rebates require an invoice and an audit trail
- Supporting evidence: display photos, activity reports, system order numbers
- No redemption without supporting evidence
26. The Financial Hook into MAP Enforcement
| Breach | Financial Action |
|---|---|
| First public price violation | Written warning requiring restoration within 2h; if remediation is inadequate, 50% of that month's rebate is deducted |
| Repeat offence | Supply suspension + credit limit reduction + delisting assessment |
27. Reconciliation Discrepancy Handling
| Discrepancy | Handling |
|---|---|
| ≤0.5% of monthly shipment value | Adjusted in the following month |
| >0.5% | Suspend the next shipment until reconciled |
| Disputed | Our outbound record plus the logistics signature prevails (per the contract) |
28. Checklist (Jointly Signed by Legal)
[ ] The prepayment / balance / release milestones are fixed in writing
[ ] The bad debt policy has been entered into finance
[ ] The rebate evidence rules have been issued
[ ] The reconciliation dispute clause has been written
[ ] Automatic triggers for the health score and supply suspension have been set