What Is Cash on Delivery and How Does It Work?

Cash on delivery (COD) is a type of transaction where a customer pays for a product upon delivery. Retailers assume a greater financial risk when offering COD as a payment option, as there is a possibility the buyer will decide not to keep the item and send it back without having to pay. However, COD is appealing to customers, as they can assess the item in person before purchasing.

How cash on delivery works

Retailers can offer cash on delivery for both perishable and nonperishable goods. In a COD arrangement on perishable goods, such as a phone order from a local pizza shop, a customer typically pays the delivery driver directly for the entire order.

For nonperishable goods, a customer will either pay the shipping fees and/or a deposit (but not the cost of the goods) upfront or pay all associated costs at the time of delivery. In the latter case, after deducting their delivery and handling fees, the handler will then send the funds to the supplier.

[Read more: Accounts Payable vs. Accounts Receivable: What's the Difference?]

Cash on delivery vs. cash in advance

As the name implies, cash in advance involves the buyer paying for goods ahead of delivery. This is the most common payment arrangement for online marketplaces and international business trades and helps reduce the risk of nonpayment for the seller. The buyer, however, risks paying for damaged goods or an incorrect order.

With cash on delivery, the seller assumes the risk that the buyer will not want their order and return it without payment. When deciding on payment options, be sure to consider your business’s ability to assume financial risk, especially if you sell perishable goods that cannot be restocked.

Types of payment methods for COD

• Mobile payments: Sellers can accept mobile payments if the delivery driver is equipped with a mobile point of sale device, such as a card reader attachment on their phone, or if your business is set up to receive payment via SMS text message. This is often the best payment method for restaurants and on-demand services.
• Cash: Any delivery person or courier can also accept cash as payment for an order.
• Check: This method is less secure for sellers, as you won’t know if a check has bounced until after the customer has received their order. However, checks can be an acceptable alternative to cash if the customer doesn’t have enough on hand.
• Online payments: While not as immediate as cash or mobile point-of-sale payment, your business can opt to issue an invoice upon delivery and instruct the customer to complete their payment online after receiving their order.

[Read more: Choosing the Right Payment Methods to Accept at Your E-Commerce Business]

Pros and cons of COD

As with any type of payment option, there are advantages and disadvantages to collecting payments through COD.

Pros:

• It can improve cash flow. With COD, sellers can collect payments immediately upon delivery instead of issuing an invoice with net payment terms (Net 15, Net 30, etc.) that give the customer several weeks or months to pay. As a result, payment timelines are quicker and cash flow improves.
• It can be more appealing to consumers. Customers may opt to buy more items if they don’t have to pay upfront. COD also attracts those customers who may not have credit cards or may not want to exchange their credit/banking information online.
• It can improve your reputation. COD can help build your brand reputation and dispel any customer concerns about product quality, as it allows them to pay after they receive their order.

Cons:

• Delivery delays will lead to delayed payment. If there is a delayed delivery of your product, there will also be delayed payment.
• You run the risk of the customer refusing goods upon delivery. When customers order products with an especially long lead time, they may ultimately change their minds and return their order.
• Carrier issues could result in failed deliveries and nonpayment. Unless your business has its own internal delivery service, you’ll be entrusting all of your deliveries to a third party. This limits your control over the shipping and delivery processes and increases outside risks, like losing items in transit or missing funds collected by the delivery driver.

Before your business decides to offer a cash on delivery option, it’s wise to weigh these pros and cons to determine whether the convenience and appeal for your customers is worth the risk you’ll assume as the seller.

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