Trade References—An All-Too Often Overlooked Secret to Business Credit Success

Trade References—An All-Too Often Overlooked Secret to Business Credit Success

Trade References—An All-Too Often Overlooked Secret to Business Credit Success

Have you ever checked your business credit report and hoped creditors and lenders could have more information on your business? It could be subjective information, like if there is a seasonal pattern to your payment habits, or how long you’ve been doing business with a supplier. It’s something beyond the sheer numbers. You can get this information added to your business credit reports.

Have you ever heard of trade references?

What is a Trade Reference?

Trade references are like financial references for your business. They can truly help your business and many business owners know absolutely nothing about them.

A trade reference is subjective information used to help lenders and business to business suppliers make decisions about whether to extend credit to an applicant or provide a loan. They are one of the only parts of a credit file that isn’t just numbers or court filings and are often presented in conjunction with a formal credit report from a known business credit rating agency, like Experian or Dun & Bradstreet.

A trade reference means there is more to go on than numbers. With trade references on a credit application, there is a lot more detail. After all, building business credit is about more than just objective information.

Companies and banks which loan money and extend credit want to be sure 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.

Many business credit applications ask for three such references.

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Why Are Trade References Important?

Trade references are important because they give banks a clearer picture of how you manage your business finances.

Commercial credit reports do not normally list them. They are often from companies which do not usually report credit except in negative circumstances. This is with the exception of companies which use D&B’s Credit Builder.

That is, the companies that you list as trade references often will not be reporting any payment experiences on your business credit report. These are commonly suppliers or vendors.

Banks will check these kinds of references. They are looking for data such as the length of time the account has been open. It includes how many times you have paid late and the credit limit.

Which Companies or People Can Be Trade References?

D&B has tackled the question head on: which trade references can you use?

These references can come from both outside and inside your industry.

Companies that you have to pay usually aren’t acceptable as these sorts of references. For example if you fail to pay your rent or your electricity, there are immediate consequences.

For most companies, these core services are the highest priorities for payments. They are the least likely to reflect negative payment experiences.

The Connection Between Over 9/10 of All Merchants and Negative Business Credit Reporting

One of the harder business truths out there is that fewer than one in ten of all business credit vendors will report to the business credit reporting agencies. Yet they might report if your experience is a negative. It feels rather unfair, doesn’t it?

They will not give you a benefit for properly paying your business credit vendor bills. Yet they will report your business when you mess up.

Trade References and Business Credit Accounts That Do Not Report

Still, these trade accounts can be helpful. While you want trade accounts to report to at least one of the CRAs, you can always ask non-reporting accounts for trade references. After all, if you are not going to get an objective benefit of building your business credit, then you may as well get the subjective benefit of a trade references.

Which Companies Are Best for Such References?

The best candidates are vendors and suppliers which your company pays on time. This is even though they could in theory be put off for some time without consequence (like with a Net 30 arrangement). Talk to them about trade references. They just might be receptive to the suggestion.

And don’t give up! If you are turned down for a trade reference, maybe it was because your business had too short a history with a particular vendor. Or maybe they felt it was too difficult to write one. Another reason could be that they did not know you well. Or maybe you just reached the one account representative who, for whatever reason, does not write trade references.

Why not try later (say, a quarter of a year later or so)? You’re an entrepreneur. You know that a ‘no’ answer does not always have to mean it will stay that way for ever and ever. When you are talking trade references, you may need to look at the big picture and the long term.

Why Business Trade References Matter

Lenders and credit suppliers will often ask just how long an account has been open. They will ask about its credit or purchasing limit, and how many times (if any) the amount due has been paid late. Such inquiries can come either by telephone or in writing.

Creditors will place a higher value on customers with longstanding payment histories. They often will save their best deals for credit applicants with the best trade references and credit profiles.

A Trade Credit Reference Can Provide an Accurate and Correct Picture

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.

Some suppliers, in particular smaller businesses, will not report client histories at all. Hence checking trade references is 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 cash flow to pay any bank loans and larger suppliers, they might be putting off smaller creditors. In this way, these businesses on the edge can paint a misleading credit portrait.

Therefore, if the tables are turned and your business is extending payment terms, it is important to check both large and small references. You can save yourself the time and headaches of taking on new clients with accounts that have a high chance of going into collections.

This is true of both companies looking to extend credit, and banks looking to make loans. And for startups, this is really vital.

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What Are the Typical Number and Type of Trade References?

A standard business credit application will ask for three trade references. Trade references tend not to come from 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 they don’t do this with 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 like computer equipment and raw materials, will be the most valuable.

Secondary trade references may include subcontractors that may be willing to not be paid until the main client pays. As a result, these examples of credit references could be less reliable indicators of a small business’s overall financial health. Still, lenders and credit providers should take any negative feedback on a trade reference sheet seriously.

How to Make a Credit Reference Request if You Are the Creditor Asking About a Company You Do Business With

This great business credit reference form came from Business Debt Line. Fill in the blanks or information in square brackets [].

Same Trade Reference Request Letter for Creditor

From:

__________ [Sender’s name]

__________ [Sender’s address]

__________

__________

Date: __________ [Sender wrote the letter on this date]

To:

__________ [Receiver’s name]

__________ [Receiver’s address]

__________

__________

Dear Sir/Madam:

Re: [enter the name of the company you are asking about here]

I have received an application for a credit account from the above named company. Your name has been given as a referee. Therefore, I would be grateful if you could answer the following questions.

How long has the customer traded with you? ________________________________
What are your terms of payment? _______________ days
Does the customer generally pay within the time required? YES/NO
Would you consider the customer to be a good credit risk? YES/NO

Please add any other comments you feel are relevant below.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________

Once you have completed this form please return it in the envelope provided.

Thank you for your assistance.

Yours faithfully,

Signature

Name

For and On Behalf of Your Business

How to Ask for One if You Need a Trade Reference for Your Company

Fill in the blanks or information in square brackets [] and select anything with a slash (/) and delete the other choice.

Same Trade Reference Request Letter for Company

From:

__________ [Sender’s name]

__________ [Sender’s address]

__________

__________

Date: __________ [Sender wrote the letter on this date]

To:

__________ [Receiver’s name]

__________ [Receiver’s address]

__________

__________

Dear Sir/Madam:

Re: Trade Reference for [your company]

It has been [your company]’s pleasure to conduct business with you for [number] years/months. The company is applying for more credit, and I hope to be able to cite your name as a referee. Would that be possible? Please let me know either way.

If the answer is yes, then I have prepared a few brief questions. Please send back in the enclosed envelope and we will type it up. We will send it back with another self-addressed, stamped envelope, so you can send us a signed copy. Of course we will enclose a copy for you to keep for your records.

Therefore, I would be grateful if you could answer the following questions.

How long has [your company] traded with you? ________________________________
What are your terms of payment? _______________ days
Does [your company] generally pay within the time required? YES/NO
Would you consider [your company] to be a good credit risk? YES/NO

Please add any other comments you feel are relevant below.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________

Once you have completed this form please return it in the envelope provided.

Thank you for your assistance.

Yours faithfully,

Signature

Name

For and On Behalf of Your Business

How to Write a Trade Reference Letter About a Company You Do Business With

Fill in the blanks or information in square brackets [] and select anything with a slash (/) and delete the other choice in this trade reference form.

Sample Trade Reference Letter

From:

__________ [Sender’s name]

__________ [Sender’s address]

__________

__________

Date: __________ [Sender wrote the letter on this date]

To:

__________ [Receiver’s name]

__________ [Receiver’s address]

__________

__________

Subject: Trade Reference for [company name]

Dear Sir/Madam:

Thank you for requesting a trade reference. We have done business with the [company name] for [amount of time]. Our terms of payment with them are [number] days.

[Company name] generally pays/does not pay within the time required. Payment patterns with [company name] are/are not subject to seasonal fluctuations. I would/would not consider the customer to be a good credit risk.

If you have any questions, please feel free to contact me.

Yours faithfully,

Signature

Name

Business Name

What to Do with a Trade Reference Request About Your Company

Dun & Bradstreet lets you add these kinds of references to your D&B report if you sign up for their Credit Builder program. This is unique to D&B and is a value added service for enhancing the usefulness and attractiveness of your business credit report to lenders.

You can send a copy of your trade reference to Dun & Bradstreet here. It will become part of your credit report, available to anyone who pulls your report.

On Experian, you will need to have Business CreditScore Pro to see any details on trade payments.

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Takeaways

There is a lot to like about trade references.  They can provide a much clearer picture of the overall health and day to day operations of a company. They allow a credit or loan provider to dig much deeper into the financial guts of a company. And they will increase your chances of being approved for loans and credit.

This article was originally written on September 3, 2020.

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ABOUT AUTHOR

Janet Gershen

Janet Gershen-Siegel, a published author and Content Manager for Credit Suite, has an MS in Communications from Quinnipiac University, a JD from Widener Law School, and a BA from Boston University. She has been admitted to practice law for over 30 years, with a focus on litigation. She regularly writes for Credit Suite, which helps businesses build credit for their EIN that’s not linked to their SSN, and get approved for loans and credit lines.

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