Agency and distribution agreements are a necessary part of business growth but they can be confused with one another. An agent is usually granted authority (or ‘agency’) to negotiate and enter into contracts or sales on behalf of the principal business.
Agency agreements usually limit an agent’s debt liability as the business assesses the credit risk of the customer. In addition, when products or services are purchased, there is only one contract between the principal and the end customer as the agent does not own the goods during the agency and the agent gets paid through a commission from the principal.
Distribution agreements do not give a distributor any authority to negotiate or complete sales on behalf of the principal business. Instead, the distributor buys the products outright from the principal and resells them to a reseller or an end consumer. The distributor owns the goods bought from the principal and there are two sales contracts in a supply chain, the distributor buys the products from the principal business and the end customer buys the products from the distributor. In distributor agreements, it is all about their profit from the margin on the sale of the goods or services to the end customer.