Collection Escalation on a Past-Due Mechanical Contractor
Ridgeline Mechanical owes your HVAC supply company $286,400. The aging is $121,000 over 90 days, $97,000 in the 61–90 day bucket, and $68,400 current. Terms are net 30, but Ridgeline's average DSO with you is 88 days. The owner promises a 12-month payment plan at 6% interest, secured by a personal guarantee, and wants you to release a new $120,000 order on net 45. He refuses to provide financial statements, citing private company concerns. A $25,000 check from last month was returned NSF, then replaced. Your credit insurance policy requires notice of a delinquency over 60 days within 10 days of discovery and covers 90% of eligible receivables after a $10,000 deductible, but the policy excludes sales to a customer already more than 60 days past due. Sales argues that stopping shipments will push the contractor to a competitor and jeopardize the whole balance. Your lien rights on two active jobs expire in 12 days if preliminary notices are not filed.
1. Evaluate the proposed 12-month payment plan. What quantitative and behavioral factors support or undermine it?
Read the worked answer
A 12-month amortization of $286,400 at 6% requires about $24,650 per month (monthly rate 0.5%, n=12), with total interest of about $9,400. On paper the plan is affordable only if the contractor's cash flow is real. The behavioral record undermines it: average DSO of 88 days, an NSF check, a refusal to provide financials, and a request for $120,000 of new unsecured credit. The personal guarantee is only as good as the owner's undisclosed personal financial statement. The new order would raise exposure to $406,400. A payment plan without verified cash flow, a down payment, and security is a collection delay, not a credit solution. Support would come from a large down payment, documented jobs, and a joint-check arrangement. Undermining factors dominate.
2. Decide whether to ship the new order and outline a collection escalation plan with deadlines. Consider the credit insurance notice and lien deadlines.
Read the worked answer
Hold the $120,000 order. Offer COD or cash-secured release; do not add unsecured exposure while the account is 90+ days past due. Immediate actions: (1) file preliminary notices or lien claims on the two active jobs before the 12-day deadline; (2) notify the credit insurer in writing within the policy's 10-day notice requirement, recognizing that the new order may be excluded if shipped after delinquency; (3) send a demand letter with a 10-day cure; (4) require the owner's personal financial statement, a personal guarantee, a UCC-1, and a joint-check agreement; (5) suspend all open orders. If the customer does not provide documents and a 30% down payment on the old balance, refer to a collection attorney. Sales' fear of losing the customer is real, but shipping more increases the loss and may impair lien and insurance rights.
3. What terms would you offer if you choose to continue the relationship? Explain how each protects the seller.
Read the worked answer
If continuing, offer COD for new orders; a cashier's check or wire for the $120,000 release; a written 6-month note for the past-due balance with a 20% down payment; personal guarantee; UCC-1 on non-exempt equipment and receivables; joint-check agreement with the general contractor; and a right of setoff. Each term addresses a specific risk: COD stops new exposure, the down payment tests commitment, the guarantee and UCC-1 create recourse, and the joint check diverts job proceeds. Lien rights protect the older receivable, but they must be perfected on time. Do not release the new order on net 45. If the customer rejects the structure, the rational choice is to collect, not to sell.