Why is a Dropship Agreement Better than an Agency Agreement?

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Table of Contents

• What is an Agency Agreement?
• Is a Dropship Agreement better than an Agency Agreement?
• Requirements under a Dropship Agreement
• Difference in money flow
• Conclusion

A Dropship Agreement is where your business takes a customer’s order and forwards this order directly to the supplier, and the supplier delivers the products directly to your customer.

What is an Agency Agreement?

In an Agency Agreement, you would be acting as an agent. This means that the supplier provides you with the products, and you resell the products directly to your customer.

Is a Dropship Agreement better than an Agency Agreement?

Regardless of which type of agreement you enter into, it is important that you understand your obligations and responsibilities under it.

Generally, in an Agency Agreement, as the reseller, you may have more onerous obligations and duties than if you were under a Dropship Agreement, as it is the supplier’s responsibility to deliver the goods to your customers. Often, in such an arrangement, any problems with the product or delivery, will also be the responsibility of the supplier and not you.

Although your responsibilities under a Dropship Agreement may be less onerous than your responsibilities under an Agency Agreement, it is still important to understand what your responsibilities are.

Requirements under a Dropship Agreement

As an agent under a Dropship Agreement, you are required to:

• not set up a competing business;
• not to make a profit at the expense of the supplier;
• to comply with advertising instructions provided by the supplier;
• not to make any untrue or misleading representations about the products; and
• place orders with the supplier in a timely manner so that the supplier is able to fulfil the orders.

Difference in money flow

Another difference between a Dropship Agreement and Agency Agreement is the flow of money.

In a Dropship Agreement, any money you receive from a customer for an order is yours. You would then use this money to pay for the corresponding order from the supplier, either including or excluding delivery fees depending on your arrangement with your supplier.

Under an Agency Agreement, the money you receive directly from the customer is not your money but rather the supplier’s money. Once the order is fulfilled, then as an agent, you can invoice the supplier for your services, and this is to be paid by the supplier or set-off against the money that you are holding on behalf of the supplier.

Conclusion

Whether a Dropship Agreement or an Agency Agreement is more beneficial to your business depends on the arrangement between you and your supplier. If you are looking to enter into some sort of business arrangement, it is important that you enter into an agreement that clearly sets out how the relationship will work, how products will be delivered, and how each party will be paid. This will help avoid disputes in the future. If you have been provided with either a Dropship or Agency Agreement, and there are provisions that you are unsure about, do not sign the agreement. Have a lawyer review it for you and explain your risks and obligations.

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