Business: Importance of collecting your debts

December 11, 2015

In these times of tanking oil and gas prices and considerable economic uncertainty, the effective collection of outstanding debts is critical in ensuring the continuing health of your business.

Three key collections strategies will assist in your efforts to get paid for work you’ve done or goods you’ve supplied.


1.    Know who you are doing business with.


The simple fact is that your chance of getting paid by a company or individual that has prior debts or is insolvent is far less likely than being paid by a healthy company that is a going concern.  It is more than prudent to protect your right to collect by conducting some due diligence on the front end before credit is extended to any potential customer.


Inexpensive investigative tools at your disposal include conducting credit checks and searches of the Alberta Personal Property Registry.  This will give you information about the health of the entity that you are considering doing business with.  It will also give you information about other potential creditors who will be in priority to you due to a prior registration of a secured interest at the Personal Property Registry.


Also, don’t discount the power of the internet to collect information about a potential customer.  Do some online sleuthing and take note of the following when you are considering extending credit to a company:  Does the business have a website?  Does it have any reviews online?  If so, are they positive or negative?  What about the principals of the company and their online presence and reputation?  These can all help you evaluate whether this is the type of company that you want to do business with.


2.    Don’t extend credit without a Credit Application.


The importance of a Credit Application that defines the ongoing relationship between Creditor and Debtor cannot be overstressed.  A well-drafted Credit Application should accomplish a number of things:


  • It should identify the identity of the corporation, partnership or individual who will be responsible for the account.


  • It should confirm the authority of the person signing the Credit Application to bind the Debtor.


  • It should stipulate an interest rate that the Creditor will apply on unpaid accounts.  It is a common misconception that by simply putting the interest rate on an invoice to the Debtor it is enforceable. By stipulating the interest rate in the Credit Application signed by the Debtor or its authorized representative, the higher interest rate will be enforceable should the matter proceed to Court.


  • It should have a term that if collection proceedings are required, the Debtor will be responsible for payment of the Creditor’s legal costs in full.  But  for  this  provision,  the  Creditor  is  only  entitled  to  receive “Court  Costs”,  which are usually  far less than  full indemnity  for legal fees.  By stipulating  that the Debtor  will pay “solicitor  and their own client costs” in the Credit Application,  which the Debtor has  acknowledged   by  its  authorized  signature,   the  Court  will enforce an award of solicitor and their own client (or full indemnity) costs as against the Debtor if the Creditor is successful in obtaining a Judgment.


  • It should provide the Debtor’s references and authorize the Creditor to contact  references  regarding the reliability  of the Debtor in payment  of its accounts,  and should also provide other information (for example, banking information) that may be of assistance  in the event that collection  proceedings  are required.


3.    Don’t delay when payments are missed.


The older the age of the receivable, the less likely that payment will result. Depending on the industry, if an account is older than 90 days it rapidly loses value.   Generally, if a customer owes on an account that remains unpaid for longer than 90 days, you can assume that they are having financial problems.  If action is not taken quickly on a 90 day or older receivable, the customer debtor is likely to become insolvent resulting in little, if any, recovery.


We recommend that you establish a policy whereby after 60-75 days with no payment, demand for payment is made within a short period (approximately 10 days) during which payment must be received or the matter will be referred for legal proceedings.


Obviously, there are customers and industries where such time periods may be inappropriate and you will need to adjust your strategy accordingly (especially if you may have lien rights in relation to the debt).  The main point is that you must have a strategy and must stick to it with respect to collection of your receivables or many accounts are likely to fall through the cracks.



Questions? Contact Beth Younggren for more information>>

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