Area of Law: Business Law
Answer # 229
Extending credit and credit checksRegion: Ontario Answer # 229
Many businesses extend credit to their customers. This means that the business provides goods or services to the customer without requiring payment right away. The customer then owes the business a debt. Before you extend credit to your customers, you can conduct a number of searches to check the credit record of the borrower and verify whether other lenders have existing claims on their assets. The type of credit search you will need depends on the type of business you are in and the amount of credit you want to offer. The eight most common searches include:
- A search under the Ontario Personal Property Security Act,
- A credit search at a Credit Bureau,
- A Writ of Execution search,
- A search under the federal Bank Act,
- A corporate search,
- A bankruptcy search,
- A search at the Official Receiver’s Office, and
- A Vehicle Record and Driver Record search.
1. Personal Property Security Act search
In exchange for extending credit to your customers, you can take security on the debtor’s assets, usually the one you sold to them. This means that if the customer does not pay the debt, you can take possession of their asset, sell it, and take the money you are owed out of the proceeds. Any money received from the sale that is more than the amount owed must be returned to the debtor. A Personal Property Security Act search is conducted to determine if there are any registered liens against the personal property of the individual or the business. This is important because the customer may have already used the property as collateral. To conduct this search, you can use the Access Now online service provided by the Ontario Government. In addition, you will also be able to register a personal property lien using the Access Now service.
There is a small fee for each name or vehicle identification number searched.
2. Credit Bureau search
The second type of search is a credit search. A credit search provides information about the credit history and credit rating of the person or business you are searching. It will also give you some information about outstanding loan or credit card payments, if the borrower makes payments on time, and if there are outstanding liens. It will also help you to determine the level of risk involved in giving credit to the customer.
To conduct this search, information will have to be obtained from the two credit bureaus in Ontario: Equifax and TransUnion Canada. Credit information can only be obtained by businesses who are registered members of the credit bureau. Businesses wishing to be members must pay an annual membership fee. It is not possible for individuals to be registered, however, individuals can request their own personal credit check. Therefore, a business can require the borrower to obtain and submit their credit report before being extended credit by the business.
3. Writ of Execution search
The third type of search is an execution search. An execution search reveals whether there is a legal judgment against the person or business being searched. A judgment is a decision made by a court, and means that the court has ordered that person or business to pay a sum of money. The person who is owed money by your customer may have legal claims to their property. Also, if your customer already has a judgment against them, it probably means that they are a credit risk.
To conduct an execution search, you may search the Ministry of Attorney General database. Local searches of the Writs System can be performed at any enforcement office of the Ministry by its staff, but only with respect to writs of execution filed in the local jurisdiction. Teranet offers enhanced services at any Land Registry Office (LRO) through Teranet’s ROSCO terminals or remotely through Teraview for writ searches across all sheriff/enforcement office jurisdictions. End users can also access services through Teranet’s Teranet eXpress website to perform searches of the Writs System by enforcement office or across the province and can issue and file Writs of Execution electronically. For more information, visit Teranet.
You will be required to fill out a search form and pay a fee. There are also commercial services that conduct these searches for a small fee.
4. Bank Act search
A fourth type of search is a Bank Act search. A Bank Act search will reveal whether a bank has taken security on the same property that your customer is trying to give you as collateral. If the bank does have a claim on the property, it means that it has loaned your customer money and that it has the right to take possession of and sell the property if the loan is not paid. This is important for you to know for two reasons. First, it shows that the person or business you are going to lend money to already has a debt with the bank and it therefore may not be in a stable financial position. Second, it will show you if the collateral you are supposed to receive is already secured.
A private search firm can conduct this search for you for a small fee.
5. Corporate search
A fifth type of search is a corporate search. A corporate search reveals information about a corporation including the registered corporate name, any registered business names, the date of incorporation, whether the corporation is active, and the names of the directors and officers.
To search for information on an Ontario corporation, you must complete a Government of Ontario, Corporation Profile Report. If you wish to search a Canadian corporation, you can search online at Corporations Canada.
6. Bankruptcy search
The sixth type of search is a bankruptcy search which tells you whether the person or company being searched has filed for bankruptcy in the last five to six years. This search can be done by contacting the Office of the Superintendent of Bankruptcy. There is a small fee for each name searched.
7. Search at Official Receiver’s office
Next, a search at the Official Receiver’s office reveals whether the person or company being searched is or has been bankrupt. It also reveals whether they have filed a proposal under the federal Bankruptcy and Insolvency Act. You can pay a private search company to conduct this search for you, for a small fee.
8. Vehicle record and driver record search
Finally, Vehicle Record or Driver Record searches reveal information about vehicles and drivers, such as who owns a vehicle and how many vehicles the person being searched owns. To request these searches, you must complete specific forms that are available at the Ministry of Transportation. There is a small fee for each search conducted.
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