COD Terms

Even COD (cash on delivery) customers should be assigned credit limits commensurate with the risk that the customer's check(s) might bounce. 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.

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.

Source: "Credit and Collection Manager's Manual" edited by Michael Dennis and Steven Kozack.