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Agents Liable for Customer Bad Debt?

Should Agents be 100% liable for their customer’s Bad Debts?

Imagine one of your largest customers going belly up… and they owe you and your Broker company $50,000.00…

You soon learn there is no hope of collecting any of the money owed…

Who should pay for that bad debt?

It should be split the same way your commission was paid out between you and your Broker. If you are on a 50% / 50% split with your Broker, then you should both pay $25,000.00 of the bad debt.  If you are on a 60%/40% split, you would pay $30,000, and the Broker would pay $20,000.

Why?

Its fair. Its ethical. And both parties always have great interest in doing business with customers who will pay you.

I’ve heard of Brokers paying 100% of any bad debts from their Agents… They are CRAZY !

Lets me share a story with you…

I know of a company who practiced the policy of paying 100% of any bad debts from their agents. They did it because they thought it would lure agents into their company, and you what? They were right! They did lure a lot of agents into their company!

A few years down the road, they were hit for a $400,000.00 bad debt from one customer, then another one for 109,000.00, then another one for $55,000.00. The agent (who’s customers they were) didn’t care… he didn’t have to pay any of that $500,000.00+ back. No worries for him…

But there was great pain and anguish for all the other agents, and the broker. The broker was not in position to handle these rapidly mounting bad debts (there were more that rolled in). The broker tried to work things out… but the hole they were in got deeper and deeper too fast.

The broker quit paying the carriers.

The carriers sued all of the customers (and I mean EVERY single customer).

The customers had to pay all the freight bills again. (after already paying the broker months ago).

The customers were very angry.

The customers no longer trusted the agents they had worked with for years.

Good agents and several other good people lost their customer base – and their jobs. They could no longer provide for their families.

Agents now had to start over – their previous customer relationships were ruined because their broker ended up going belly up and not paying the carriers.

The criminal thing behind it all was this: There was a rotten apple agent who PURPOSELY did business with companies he knew were at risk of not paying their freight bills for one reason or another. Because he was paid his commission each week – he knew he would be paid before the bad debts hit the broker.  One bad apple spoiled the bunch… Actually, he put them out of business.

2 Responses to “Agents Liable for Customer Bad Debt?”

By John D Thomas - 2 March 2010 Reply

You are overlooking one very important item – who is responsible for running credit checks? The agent may bring all sorts of new customers to the table and if the agent is responsible for prequalifying customers, then the agent is party to the loss. Otherwise, it seems the broker is at fault and should have NEVER let the receivables get out of hand to such an extent that any one receivable would cripple the company.

By Steve - 2 March 2010 Reply

Thanks for your comment, John. The owner did not share with me his credit approval process. The topic of credit approval would be a great topic for a future post. I agree the Brokers must be performing credit checks on new customers. Credit checks are a great place to start with any new customer. Other due diligence and research will also help give clarity to credit worthiness of a new customer.

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