Published By Janet Gershen-Siegel at September 14, 2017
You may have heard or read the term ‘trade reference’, but do you really know what it’s all about? Are you asking yourself, what does ‘trade references’ mean on a credit application? Then here are the details.
A trade reference on a credit application is used to help lenders and business to business suppliers make decisions about whether or not to extend credit to a credit applicant. These references are usually presented in conjunction with a formal credit report. Such a formal credit report wouldcome from a known business credit-rating agency such as Experian or Dun & Bradstreet. Companies and banks which loan money and extend credit want to be sure that their customers can pay their debts on time and in full. Excellent trade references are an important asset which successful companies should place a high value on.
Lenders and credit suppliers will often ask — either by telephone or in writing — just how long an account has been open, its credit or purchasing limit, and how many times (if any) the amount due has been paid late. Creditors naturally place a higher value on customers with longstanding payment histories. Plus they frequently will save their best deals for credit applicants with the best trade references and credit profiles.
Some banks may not report negative payment histories to the big national credit bureaus (Experian, Equifax, and Dun & Bradstreet) until the borrower is 30 or 60 days late. And some suppliers, in particular smaller businesses, will not report their client histories at all. These factors make checking trade references vital when companies are making the decision to extend credit. In addition, month to month payment histories will always represent a far more accurate picture of a small business’s true financial viability. This is because even companies with good cash flow could be taking unreasonable risks at the expense of their suppliers.
Most businesses realize that maintaining a prime credit rating is very important. Therefore, if they start struggling, they may become good at prioritizing their debt and supplier payments. This is like the old expression, ‘robbing Peter to pay Paul’. By using their cash flow to pay any bank loans and larger suppliers, they might also be putting off smaller creditors. In this way, these businesses on the edge can paint a misleading credit portrait. Therefore, by checking both large and small references, companies looking to extend credit, and banks looking to make loans, can save themselves the time and headaches of taking on new clients whose accounts have a high chance of going into collections.
A standard business credit application will ask for three trade references. These are often creditors and suppliers within the industry. They tend not to be utilities like telephone and gas service. This is because many struggling businesses may try to put off their suppliers for a month or two, but not the utility companies. At least, they won’t do this if they want their offices to have heat and lights. Primary and direct references, which include suppliers of items such as computer equipment and raw materials, will be the most valuable. Secondary references, which will include subcontractors who may be willing to not be paid until the main client pays, can be less reliable indicators of a small business’s overall financial health. However, any negative feedback should always be taken seriously.
Trade references can provide a much clearer picture of the overall health and day to day operations of a company. These allow a credit or loan provider to dig much deeper into the financial guts of a company to get to the real truth about the business’s financial viability.