Net Terms vs. COD: Managing Credit Risk for Cannabis Sales

More than $4 billion in outstanding receivables now circulates through the cannabis supply chain, with delinquencies surging as wholesale prices drop. For brands extending credit to retailers, the stakes are existential: each dollar trapped in AR is working capital you can't use to fund production, pay suppliers, or survive the next pricing shock.

The decision between cash-on-delivery and net terms isn't a back-office policy choice. It's a strategic positioning decision that determines whether your brand builds market share or bleeds cash into uncollectible invoices.

The Math Is Punishing

A brand running $500,000 in monthly credit sales on Net 30 terms carries approximately $575,000-$625,000 in receivables at any given time -accounting for typical several week payment delays beyond stated terms. If DSO drifts from 30 to 60 days, you've got an additional $500,000 trapped in unpaid invoices. That's half a million dollars you can't deploy.

Best-in-class distribution operations maintain DSO of 40-50 days with bad debt under 0.5% of sales. Most cannabis operators aren't hitting those benchmarks. And unlike traditional industries, Section 280E prevents you from deducting bad debt as an operating expense -you can only work around it through returns and allowances, requiring meticulous documentation that most brands lack.

When COD Makes Strategic Sense

COD eliminates credit exposure entirely: zero aging reports, zero collection calls, zero write-offs. During extreme market volatility, COD operators avoid the cascading defaults plaguing credit-based competitors.

Use COD or short terms when:

• New customer onboarding. Start every relationship with COD or Net 15 with a deposit. Trust is earned through payment performance, not promises.
• High-risk customers. Any retailer showing deteriorating payment trends - average days to pay increasing, on-time percentage declining - should move to COD immediately.
• Market volatility. In mature markets like California, Oregon, and Colorado where oversupply has crushed margins, conservative terms are survival strategy.
• Small transactions. If credit administration costs exceed your profit margin on an order, COD simplifies everything.

The tradeoff is real: businesses offering net terms capture sales from cash-constrained customers that COD operators lose. In crowded markets where multiple brands compete for limited retail shelf space, credit terms often determine supplier selection.

The Risk-Based Tiering Framework

Leading brands don't apply universal credit policies. They tier customers by creditworthiness and adjust terms accordingly.

Tier 1 (Lowest Risk): Established retailers with 95%+ on-time payment history, strong financials, and consistent order volume. Offer Net 30-45 with credit limits up to 15-20% of their net worth. These customers earn flexibility through demonstrated performance.

Tier 2 (Moderate Risk): Good payment history but thinner margins or moderate leverage. Net 30 with conservative limits (10% of net worth). Quarterly financial reviews.

Tier 3 (Elevated Risk): Variable payment patterns, declining financials, or operating in distressed markets. Net 15 or COD with deposits. Weekly monitoring of payment status. Move to COD at first missed payment.

Tier 4 (High Risk): Poor payment history, weak financials, small irregular orders. COD only. These accounts consume disproportionate administrative resources relative to revenue. Consider whether the relationship is worth maintaining.

The graduation strategy matters: start restrictive, then expand terms as trust builds. New customers begin at COD or Net 15 with deposits. Months 1-3, graduate to Net 15 with a $5,000 limit if paid on time. Months 4-6, move to Net 30 with a $15,000 limit. Beyond month 7, expand based on performance.

Quantifying the Credit Decision

Run expected value analysis on every significant credit extension:

A $50,000 order with 20% margin generates $10,000 profit under COD -100% probability of payment, $10,000 expected value.

That same order on Net 30 to a creditworthy customer (98% payment probability) looks different: $10,000 profit × 98% probability = $9,800, minus 2% bad debt risk ($1,000 expected loss), minus financing costs (~$40 for 30 days). Expected value: approximately $8,760.

The 12% expected value reduction from credit extension must be weighed against incremental sales volume. If offering terms increases your sales by more than 12%, net terms create superior outcomes despite credit risk. If not, you're subsidizing sales with your working capital.

Three Actions to Implement This Week

Audit your current AR aging. Calculate your actual DSO and compare it to your stated terms. If you're offering Net 30 but averaging 52 days to collect, you have a collections problem masquerading as a terms policy. Each additional day of DSO locks up approximately 3.3% of monthly revenue.

Segment your customer base. Rank every account by payment performance over the past 90 days. Any customer whose on-time percentage dropped more than 15 points or whose average days to pay increased more than 10 days requires immediate credit review. Move deteriorating accounts to shorter terms before they become write-offs.

Document everything for 280E. Since bad debt isn't deductible as an operating expense, structure write-offs as returns and allowances against gross receipts. This requires contemporaneous documentation - credit memos, customer correspondence, evidence of collection attempts. Build this discipline now, before you need it.

The $2.24 billion AR crisis isn't distributed evenly. Operators with systematic credit management, risk-based tiering, and proactive collections will capture market share from competitors bleeding cash into uncollectible receivables. The brands that survive the current pricing environment won't be the ones with the best products - they'll be the ones who get paid.