COD Terms; Slow Pay; High Risk; Risk Mitigation;

If an applicant has a history of slow pay with trade creditors, there is no reason to expect that they will pay your company any better.  For this reason, COD terms may be the best option.  Even COD (cash on delivery) accounts should be assigned credit limits commensurate with the risk that the customer's check(s) might bounce.  Generally, creditors require customers purcahsing on COD terms to delivery to the driver cash or a cashier's check.

Credit professionals need to qualify COD customers for specific COD credit limits. How? One source is credit reports. Review credit reports to see if other creditors are paid as agreed, or alternatively may have placed the account for collection or filed suit over one or more NSF checks. A prudent trade creditor will also request a bank reference and contact the bank before making a decision about offering COD terms. 

Creditors that do not take the time to qualify companies for COD terms will have more NSF checks returned and [unfortunately] more bad-debt losses than companies that establish dollar limits on all customers including COD customers, and assign credit limits accordingly.  Typical reasons for a check to be dishonored by the bank on which the check is drawn include:

• Insufficient funds; 
• Instructions to return to maker;
• The customer signature is missing or incomplete;
• Payment was stopped on the payment;
• The account was closed;
• The check was post dated;
• The check was stale dated.

It may seem counter-intuitive, but selling on COD cash terms can result in bad-debt losses. Most common carriers do not allow their drivers to accept cash payments. Therefore, by common usage COD cash terms actually means that payment is due on delivery in the form of a cashier's check or money order made payable to the seller. If the delivery driver makes a good faith effort to determine that the payment received is in fact a cashier's check or a money order, the carrier would not be liable if it turns out that the check or money order were counterfeit. 

Thanks to the proliferation of color printers, scanners, and desktop publishing software, it is easy to make a good facsimile of a cashiers' check or money order. Since it normally takes several days for the check to be delivered to the seller, in many cases by the time the check has been presented for payment and the counterfeit payment is discovered, the criminal and the merchandise are both long gone.   If a COD shipment is refused by the buyer, the creditor will have to pay freight costs in both directions.  If the product is a special order, there may be no ready made market for the goods once they have been returned. 

One solution to this problem is to require a new or unknown customer "willing" to pay for an order with a cashiers' check or a money order to wire transfer you the payment instead.  Simply because a customer has enough money on deposit on a certain day to cover a check it has written does not mean that the money will be available when the check is presented for payment. By hand delivering the check for the first order to our salesperson late in the day, this customer was guaranteed at least one extra day of float on the check before it could be presented to its bank and ultimately returned due to insufficient funds.

© 2009 by Michael C. Dennis.  All Rights Reserved.  Michael is the author of "Credit and Collection Handbook."