Net Terms vs COD: The New-Customer Decision Tree

Why this matters

When a brand-new customer asks for an invoice instead of paying at the door, you are deciding whether to lend them money. Net terms (you do the work, they pay later) is a loan, plain and simple. Get it wrong on a big job and you can do weeks of work, cover materials and payroll out of pocket, and then chase a stranger for payment. Get it wrong the other way and you turn away a good commercial account over nothing. This tree gets you to the right call fast.

Start here: what kind of customer is this

The decision splits early on who is in front of you.

• A residential homeowner you have never served defaults to COD or pay-at-completion. There is no reason to extend terms to someone with no history. This is normal and not insulting; most shops do it.
• A commercial or property-management account is where net terms actually make sense, because they often pay by check on a cycle and cannot hand you a card on the spot. Here you do real vetting before saying yes.

If residential, skip to "Residential: collect at the door." If commercial, work the checks below.

Commercial: run the size-and-risk check

If the job is small (a service call, a minor repair), the cleanest path is to take a card on file or COD and skip the terms conversation entirely. The exposure is tiny and chasing a small invoice costs more in your time than the invoice is worth.

If the job is large (multi-day, heavy materials, a project), terms are reasonable to discuss, but only after vetting. A large job on terms with no checks is the single most common way a shop gets badly burned.

Vet before you extend terms

Before you grant net terms to a new commercial account, confirm:

1. They are a real, registered business. Look them up. A legitimate company with a physical address and a track record is a far better risk than a name on a phone call.
2. You have a signed work authorization or a purchase order. A PO is a written promise to pay from a company's accounting system. No PO on a large commercial job means no protection. Require one.
3. They will give a trade reference or pass a basic credit check. A business that pays its other vendors on time will say so and let you confirm it. One that stalls on this question is telling you something.
4. You have a deposit on anything material-heavy. Even on terms, collecting a deposit up front means you are not financing their materials with your own cash.

If they pass all four, net terms on a defined cycle is fine. Put the due date in writing on the invoice and state your late policy.

If they balk at any of them, that is your answer. Offer COD, a card on file, or a deposit-plus-balance structure instead. A serious account will understand; a problem account will push back hard, which is the warning you wanted.

Residential: collect at the door

For homeowners, the safest structures, in order:

• Pay on completion by card or check before you leave the site. Simplest and lowest risk.
• Card on file authorized before work starts, charged when the job is done. This removes the "I'll mail it" gap.
• Deposit then balance for any job with real material cost, so you are never out of pocket on parts.

Avoid mailing an invoice to a first-time homeowner and hoping. Your collection rate on that is poor and the effort to chase it is high.

When the answer is "not yet"

Some customers earn terms over time. A homeowner who has paid you promptly across several jobs, or a commercial account that has paid a few COD jobs clean, has built a history. Terms are a reward for proven payment behavior, not an opening offer. Letting a customer graduate into terms is good business; handing terms to a stranger is a gamble.

The default if you are unsure

When in doubt, the lower-risk option wins: COD, card on file, or a deposit. You can always extend terms later once trust is earned. You cannot un-extend terms after the work is done and the customer has gone quiet. Protecting your cash on a new relationship is not distrust; it is how you stay in business long enough to build the relationship.

References

• SBA guidance on extending customer credit and managing accounts receivable
• IRS recordkeeping standards for invoices, deposits, and business income
• Trade-standard practice for purchase orders and work authorizations on commercial jobs
• See related: Billing Promptly: The Cash-Flow Habit; Getting Paid Faster: The Systems That Help