Many businesses provide their customers with optional credit. This means that the customer can enjoy goods or services without having to pay right away. The customer will simply owe the business a debt. Before you extend credit to your customers, you can conduct several searches to check the credit record of the borrower and to determine whether other lenders have claims against the potential borrower’s assets. The type of credit check that you should conduct depends on the type of business that you are in and the amount of credit that you wish to offer. Eight of the most common credit searches include:
- Ontario Personal Property Security Act search
- Credit Bureau search
- Writ of Execution search
- Federal Bank Act search
- Corporate search
- Bankruptcy search
- Official Receiver's Office search
- Vehicle Record and Driver Record search
1. Personal Property Security Act search
You can take security on the debtor's assets that you sold to them in exchange for extending credit to your customers. If the customer does not pay their outstanding debt, you will be able to take possession of their asset, sell it, and recoup the monies owed to you from the proceeds of the sale. You must return to the debtor any sale profits that are greater than the debtor’s outstanding debt.
2. Credit bureau search
A credit bureau search will provide you with information about the borrower’s credit history and credit rating. The credit bureau search will also provide detailed information about outstanding loan or credit card payments; whether the borrower makes payments on time; and whether there are any other outstanding loans. This information will help you understand the level of risk you will assume if you decide to extend credit to the potential borrower. In order to conduct a credit bureau search, you will have to obtain information from the two credit bureaus in Ontario: Equifax Canada and TransUnion Canada.
Credit information is only obtainable by businesses who are registered members of the credit bureau. If you wish to have your business registered, you will have to pay an annual membership fee. Individuals cannot be registered members of the credit bureau however they can request to conduct their personal credit check. Accordingly, a business can require the potential borrower to obtain and submit their credit report before the business decides to extend credit.
3. Writ of execution search
An execution search will reveal whether there is an existing legal judgment against the potential borrower. Simply put, a judgment is a decision made by a court. In this case, the judgment means that the court has ordered the borrower to pay a sum of money. The person who has a judgment against your potential borrower may have legal claims against their property. If your potential borrower already has an existing judgment against them, it is likely that they are already a credit risk.
4. Federal Bank Act search
A federal Bank Act search will reveal whether a bank has already taken security on the same property that your potential borrower is attempting to use as collateral. If your search reveals that the bank does have a claim on the property, this means that the bank has loaned your potential borrower money and has the right to take possession of and sell the property if the loan defaults. This information is important to know for two reasons. First, it demonstrates that the potential borrower already has a debt with the bank and may not be in a secured financial position. Second, it demonstrates whether the collateral you are trying to secure is already secured.
Alternatively, a private search firm can conduct the federal Bank Act search for you for a nominal fee.
5. Corporate search
A corporate search reveals:
- The corporation’s registered corporate name;
- Any registered business names;
- The corporation’s date of incorporation;
- Whether the corporation is currently active; and
- The names of the corporation’s directors and officers.
6. Bankruptcy search
The bankruptcy search reveals whether your potential borrower has filed for bankruptcy in the last five to six years. You can conduct this search by contacting the Office of the Superintendent of Bankruptcy however there is a nominal fee for each name searched.
7. Official receiver's office search
This Official Receiver's office search will reveal whether the potential borrower is, or has ever been, bankrupt. This search also reveals whether the potential borrower has filed a proposal under the federal Bankruptcy and Insolvency Act. For a nominal fee, you can have a private search company conduct this search at the Official Receiver’s Office for you.
8. Vehicle Record and Driver Record search
The Vehicle Record and Driver Record search reveals detailed information about vehicles and drivers. The information discloses who owns a vehicle and how many vehicles the person being searched owns. In order to request these searches, you will need to complete some forms at the Ministry of Transportation. Additionally, you will be required to pay a nominal fee for each of your searches.
Consider consulting a lawyer for sound legal advice and further legal assistance.
Office of the Superintendent of Bankruptcy Canada
How to order your credit report