Last Updated on May 15, 2023
When you start a new business, one of the first tasks you have to learn is sales invoicing, and, in particular, transaction types. Choosing the right transaction for your business helps you get paid on time and avoid delays in cash flow. One example of a commonly used transaction is COD or cash on delivery.
Let’s take a closer look at what COD is, why it may be worthwhile for your business to offer COD, and the advantages and disadvantages of using it.
What is Cash on Delivery (COD)?
COD is a transaction whereby a buyer pays for a product at delivery instead of at the time of ordering. Most often used in online sales, COD can also stand for collect on delivery or cash on demand.
Cash on delivery purchases do not require any payment from a buyer until they receive their purchase. At that time, the purchaser must pay the entire amount due. Most service providers do not allow partial payments on COD transactions.
Even though it’s called cash on delivery, payment does not always have to be in cash. Most service providers accept check and electronic payments, too. A unique tag on the package instructs the delivery person to collect payment at delivery when a customer selects a COD transaction.
Why Businesses Offer COD Payment Terms
COD is popular among new businesses looking to develop a strong customer base and for companies that want to increase their customer relations. Here are the primary reasons a business offers COD transactions.
New Businesses Accruing Customer Confidence
For new companies that do not already possess a loyal customer following, COD services can increase customer confidence in the business. COD helps the customer feel more secure in their purchase since they know the company will not take their money without first delivering the product.
Attract New Customers
COD may help draw in new customers who previously could not make purchases because they do not have reputable credit. With COD, customers can order online and then pay in cash at the time of delivery, meaning they can sidestep the necessity of a credit card.
Cash on delivery may also attract customers who do not trust online payments. Some buyers are wary of entering their credit card information into an online purchase form in fear that someone will steal their information or take their money without delivering the product, but COD eliminates this risk.
Preference for COD Instead of Credit Payments
Businesses may offer COD if they are interested in eliminating the fees associated with processing electronic credit purchases. This way, the sellers receive full payment without additional charges. COD also helps a business avoid several of the risks related to credit payments, like identity fraud.
Requests from customers may lead a business to offer COD transactions. If customers know they will be home for a delivery, they may prefer to handle payment at that time. Customers interested in more discreet methods of payment may also request COD since it does not leave a trace in their credit or bank account history.
How is COD Different from Standard Invoicing?
The difference between COD and standard invoicing is in the payment terms. In standard invoicing, the most common payment term is Net 30, which means that the customer must pay the business within 30 days of receiving the invoice. In a COD transaction, the payment term is cash on delivery, and the total payment is due at delivery.
So, with COD, you get paid faster than with standard Net 30 invoices. The primary distinction between COD and standard invoicing is this shorter time frame to delivery, which leads to more immediate payment and more fluid cash flow.
On a COD invoice, you will want to be clear on payment terms and conditions, so the customer knows payment is due at delivery.
Pros and Cons of Cash on Delivery
If COD seems a bit risky to you, you’re not wrong. But, there are significant benefits to using it, too. Here is an in-depth look at the pros and cons of COD transactions.
Pros of COD
First, let’s examine the advantages of using cash on delivery.
Shorter Payment Period
The most beneficial aspect of COD is the shorter payment period that leads to a briefer accounts receivable period and improved cash flow and efficiency. The seller gets a more immediate payment since it is due at delivery instead of within the 30 days usually specified by standard invoicing.
Protects Cash Flow from Slow-Paying Accounts
If your business has accounts that frequently go into arrears or are consistently late with payments, you can require COD transactions on all future purchases. This way, you can continue selling to the client, but with guaranteed payment since the client must pay first before receiving the product.
Protects Against Fraud
COD helps both sellers and buyers defend against fraud. The customer feels comfortable knowing they do not have to pay before they receive their product. Whereas the seller knows they will receive payment before turning over their products.
Since there is a better guarantee that the seller will receive their money, cash flow is predictable and dependable, making it easier to budget.
A Rise in Impulse Purchases
The rise in impulse purchases is both an advantage and a disadvantage. On the one hand, since payment is not due immediately at the time of the order, buyers may be more tempted to make a purchase whose payment is not due until a later date.
However, impulse buying may also lead to more frequent delivery refusals, which results in lost delivery and shipping fees.
Cons of COD
Unfortunately, COD is not risk-free. There are two primary disadvantages to using COD.
Risk of Delivery Refusal
The risk of delivery refusal increases with COD transactions. When a buyer makes a purchase and selects COD, there is no absolute commitment that the buyer will accept the delivery and make the payment when the time comes.
If the buyer does refuse the delivery, the seller may face additional shipping and delivery fees to have the product sent back to them, which means they will not only miss out on the profit from the sale but may even lose money.
Limits on Sale Amounts
Many service providers restrict the amount of money accepted per delivery or day through COD transactions. The limit imposed by your service provider may prevent your customers from making large purchases.
Cash on Delivery FAQs
How does cash on delivery work?
With cash on delivery payment terms, the seller will ship the product to the buyer prior to collecting payment. The seller will send an invoice with the package to be shipped and delivered to the buyer. The deliverer then collects the payment for the purchase upon delivery of the product. Once payment is collected, the shipper will send the funds to the seller.
Why do people use cash on delivery?
For new and small businesses, COD payment terms can be beneficial to their cash flow. Rather than waiting the traditional 30 days for payment that’s standard with Net 30 terms, a supplier or vendor can receive payment much more quickly if they select COD.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.