Hidden Covenant Risk: The True Cost of Distributor Returns

Is Your Returns Process a Hidden Covenant Risk?

Most distributors believe they have a margin problem. The data tells a different story: they have a returns visibility problem that manifests as margin erosion, covenant pressure, and customer attrition. In today’s higher-rate environment, managing returns via spreadsheets and email is no longer just an operational nuisance, it is a direct threat to your borrowing base.

The $12.5 Million Sales Gap

Imagine your team discovers a $500,000 write-off due to dead inventory and missed vendor windows. For a distributor operating on 4% net margins, that isn't just a half-million-dollar mistake…it’s a massive sales hurdle. To recover that loss, your sales team would need to generate $12.5 million in new revenue.

Very few sales teams have the capacity to overcome that kind of headwind. This "multiplier effect" means that every single dollar lost to a return requires $25 in new sales just to break even. While your competitors are fighting for market share, you may be stuck running just to stay in place because of a backend process you haven't yet quantified.

Where the Money Leaks

Our research partnership between Distribution Strategy Group and Continuum found a staggering 90% of distributors lack basic infrastructure for returns. This lack of visibility leads to:

•  The Covenant Trap: Returns that sit unprocessed age toward eligibility thresholds, reducing your collateral value and contracting your borrowing capacity.
• Vendor Credit Leakage: Missed return windows convert recoverable credit into 100% write-offs.
• The Loyalty Penalty: Customers who encounter returns friction are 68 NPS points more likely to become active detractors.

The Vision: Turning Liability into Advantage

At Continuum, our vision is to solve this fundamental data problem. We provide returns management automation purpose-built for wholesale distributors to stop the bleeding before it hits your P&L. By streamlining vendor and customer processing, we help you protect your working capital and eliminate the need for "recovery sales".

Get the Full 2026 State of Distributor Returns Report

We’ve only scratched the surface of the financial mechanics and strategic frameworks necessary to protect your working capital. The full research brief includes:

•  Industry Benchmarks for HVAC, Electrical, and Industrial MRO sectors.
•  The 180-Day Agenda for quantifying exposure and implementing systematic tracking.
•  The Returns Excellence Framework: A 4-stage maturity model to move from reactive cost center to competitive advantage.