COD, Prepayment, and Upfront Payment Terms

Cash on delivery (COD) and prepayment terms require the buyer to pay before or at the time of delivery rather than after. These terms are the opposite of standard trade credit: instead of receiving goods or services and paying within 30 to 60 days, the buyer must pay in advance or simultaneously with delivery. Suppliers impose COD or prepayment terms when they assess the buyer's credit risk as too high to extend standard trade credit, when the buyer is a new customer without an established payment history, or when the buyer's credit account has been placed on hold due to past overdue balances.

For AP teams, COD and prepayment terms create a different processing challenge compared to credit terms. A prepayment must be made before the goods or services are received, which means there is no invoice to match against -- only a proforma invoice or purchase order. The payment is made against the proforma, and the goods are received later. The accounting treatment records the payment as a prepayment asset (not an expense or AP) and converts it to an expense or inventory when the goods arrive and the final invoice is received.

Managing COD in AP

COD payments are typically made at the point of delivery -- a driver delivers goods and the business provides payment (cheque or EFT) before unloading. In practice, most Australian businesses manage COD through credit card payment on delivery or through same-day bank transfer before dispatch. The AP challenge with COD is that the payment often precedes invoice entry in the system, creating a timing mismatch where cash has been paid but no corresponding liability has been recorded. The AP team must ensure that COD payments are entered and coded promptly rather than sitting as unreconciled bank transactions.

Escaping COD terms with a supplier requires establishing a payment track record. The standard approach is to pay COD invoices promptly for 3 to 6 months, then request a credit application to be assessed for standard terms. Suppliers who see consistent prompt payment under COD are more likely to extend credit terms because the track record removes the credit uncertainty that caused them to impose COD in the first place. AP teams should maintain a register of suppliers on COD terms and actively manage the transition to credit terms as the relationship matures.