Published By Janet Gershen-Siegel at September 14, 2017
We have all of the things you should know about trade references.
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 a tool to help lenders and business to business suppliers. With it, they can make decisions about whether to extend credit to a credit applicant. These references are usually part and parcel with a formal credit report.
Such a formal credit report would come from a known business credit-rating agency such as Experian or Dun & Bradstreet. Lenders and creditors 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. They also want to know its credit or purchasing limit, and how many times there was a late payment.
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 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 more accurate picture of a business’s financial viability. This is because even companies with good cash flow might take 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 start to prioritize their debt and supplier payments. This is like the old expression, ‘robbing Peter to pay Paul’. By using cash flow to pay 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, creditors and lenders 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 put off payment until the main client pays, can be less reliable indicators of a small business’s overall financial health. However, always take seriously any negative feedback.
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. Therefore, these are the things you should know about trade references.
Trade references of course are useful when you want to build business credit fast. But what’s the rest of the process? And what are the benefits?
Business credit is credit in a company’s name. It isn’t linked to an owner’s personal credit, not even when the owner is a sole proprietor and the sole employee of the small business. Therefore, an business owner’s business and individual credit scores can be very different.
Since corporate credit is independent from personal, it helps to safeguard a business owner’s personal assets, in the event of a litigation or a business bankruptcy. Also, with two distinct credit scores, an entrepreneur can get two different cards from the same vendor. This effectively doubles purchasing power.
Another benefit is that even startup companies can do this. Visiting a bank for a business loan can be a formula for disappointment. But building company credit, when done properly, is a plan for success.
Personal credit scores rely on payments but also various other considerations like credit utilization percentages. But for business credit, the scores actually merely hinge on whether a small business pays its invoices in a timely manner.
Building Small Business Credit is a process, and it does not happen without effort. A corporation needs to proactively work to develop small business credit. However, it can be done easily and quickly, and it is much speedier than developing individual credit scores. Merchants are a big component of this process.
Accomplishing the steps out of sequence will result in repeated denials. Nobody can start at the top with company credit. For instance, you can’t start with store or cash credit from your bank. If you do you’ll be rejected 100% of the time.
A company must be respectable to creditors and merchants. Hence, a small business will need a professional-looking website and e-mail address, with site hosting bought from a supplier like GoDaddy. Plus business phone and fax numbers should be listed on 411. com. At the same time the business telephone number should be toll-free (800 exchange or the equivalent).
A company will also need a bank account dedicated purely to it, and it must have every one of the licenses essential for running. These licenses all must be in the particular, accurate name of the small business, with the same business address and telephone numbers. Keep in mind that this means not just state licenses, but potentially also city licenses.
Visit the IRS website and get an EIN for the corporation – they’re free of charge. Select a business entity like corporation, LLC, etc. A company can start off as a sole proprietor but will most likely want to switch to a kind of corporation or partnership to diminish risk and optimize tax benefits.
A business entity will matter when it pertains to taxes and liability in case of a litigation. A sole proprietorship means the owner is it when it comes to liability and taxes. Nobody else is responsible.
If you run a corporation as a sole proprietor at the very least file for DBA (‘ doing business as’) status. If you do not, then your personal name is the same as the small business name. Therefore, you can end up being directly liable for all company debts.
Additionally, according to the Internal Revenue Service, with this arrangement there is a 1 in 7 probability of an IRS audit. There is a 1 in 50 possibility for incorporated businesses! Steer clear of confusion and considerably reduce the chances of an IRS audit as well.
Start at the D&B web site and obtain a cost-free DUNS number. A DUNS number is how D&B gets a company in their system, to produce a PAYDEX score. If there is no DUNS number, then there is no record and no PAYDEX score.
Once in D&B’s system, search Equifax and Experian’s web sites for the corporation. If there is a record with them, check it for accuracy and completeness. If there are no records with them, go to the next step in the process. By doing so Experian and Equifax will have something to report on.
In addition to trade references, you need to establish trade lines that report. This is also known as vendor credit. Then you’ll have an established credit profile, and you’ll get a business credit score. And with an established business credit profile and score you can begin acquiring revolving store and cash credit.
These trade lines are creditors who will give you preliminary credit when you have none now. Terms are usually Net 30, versus revolving. So if you get an approval for $1,000 in vendor credit and use all of it, you must pay that money back in a set term, like within 30 days on a Net 30 account.
Net 30 accounts must be paid in full within 30 days. 60 accounts need to be paid completely within 60 days. Unlike with revolving accounts, you have a set time when you have to pay back what you borrowed or the credit you utilized. To launch your business credit profile the proper way, you ought to be approved for vendor accounts that report to the business credit reporting agencies. As soon as that’s done, you can then use the credit, repay what you used, and the account is reported to Dun & Bradstreet, Experian, or Equifax.
Not every vendor can help in the same way true starter credit can. These are merchants that will grant an approval with nominal effort. You also want them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.
You want 5 – 8 of these to move onto the next step, which is revolving store credit. You may have to apply more than once to these vendors, and you may need to purchase some items you don’t need, to validate you are responsible and will pay in a timely manner. Contemplate donating unwanted things to charitable organizations.
Once there are 5 – 8 or more vendor trade accounts reporting to at least one of the CRAs, move to revolving store credit. These are businesses which include Office Depot and Staples. These companies are more likely to have goods you need. Use the corporation’s EIN on these credit applications.
Are there 8 – 10 accounts reporting? Then progress to fleet credit. These are businesses like BP and Conoco. Use this credit to purchase, repair, and take care of vehicles. Make sure to apply using the corporation’s EIN.
Have you been sensibly managing the credit you’ve gotten up to this point? Then move to cash credit. These are service providers such as Visa and MasterCard. Keep your SSN off these applications; use your EIN instead.
Know what is happening with your credit. Make certain it is being reported and take care of any mistakes ASAP. Get in the habit of taking a look at credit reports and digging into the details, and not just the scores. So make sure to update the data if there are inaccuracies or the info is incomplete.
What’s all this monitoring for? It’s to dispute any errors in your records. Mistakes in your credit report( s) can be corrected. But the CRAs usually want you to dispute in a particular way.
Disputing credit report mistakes normally means you mail a paper letter with copies of any evidence of payment with it. These are documents like receipts and cancelled checks. Never send the originals. Always mail copies and retain the originals.
Disputing credit report mistakes also means you specifically detail any charges you challenge. Make your dispute letter as understandable as possible. Be specific about the concerns with your report. Use certified mail so that you will have proof that you sent in your dispute.
Always use credit responsibly! Don’t borrow more than what you can pay off. Monitor balances and deadlines for repayments. Paying off in a timely manner and in full will do more to elevate business credit scores than nearly anything else.
Growing corporate credit pays. Great business credit scores help a company get loans. Your loan provider knows the small business can pay its debts. They recognize the small business is authentic. The corporation’s EIN links to high scores, and loan providers won’t feel the need to demand a personal guarantee.
Business credit is an asset which can help your business in years to come.
Building business credit is vital for any business. And when you think about how to build business credit, trade references don’t always come up. Yet they are extremely helpful for all of the business credit reporting agencies. Learn more here and get started toward building business credit and cultivating trade references.