When you’re building your business, your suppliers can turn out to be some of your best creditors. They will often extend short-term credit to small business owners so they can purchase the supplies they need without paying up front. This helps them too; they can cement the relationship with the business so they don’t go elsewhere.
If you get trade credit and pay those accounts on time, you can build valuable trade references that can help you establish business credit, and qualify for other types of business loans and financing.
Here’s what you need to know about trade references.
Trade Reference Meaning
A trade reference is a report detailing the payment history between a business customer and its supplier or vendor. Trade references may be supplied verbally, in the form of a written trade reference letter, or by reporting payment history to commercial credit reporting agencies such as Dun & Bradstreet, Experian or Equifax. Trade references that document on-time payments contribute to good business credit scores.
Why Do You Need a Trade Reference
If you don’t build trade references, you may find it harder to qualify for certain types of small business loans or small business financing. While you may need credit now, as your business grows or conditions change you may find your business needs additional funding to grow. Having these references can prove valuable.
Trade Credit Advantages and Disadvantages
- Often easy to get compared to small business loans
- Can improve cash flow / financial health
- May help build business credit
- Credit limits may be low, at least initially
- Limited purchasing options
- Not all trade references build business credit
How Trade References Benefit Buyers
Companies are more likely to extend credit or to do business with companies they trust and that they consider to be a low credit risk. They may request written or verbal trade references from your existing business relationships or they may check business credit reports to evaluate your business payment history with other creditors. If your business doesn’t have a strong business credit history, you’ll want to make an effort to establish business credit by using accounts that report.
Trade references are also often a key factor in calculating business credit scores, since they are a common type of credit reference on commercial credit reports. If your business doesn’t have a strong business credit history, you’ll want to make an effort to establish business credit by using accounts that report.
Good business credit may help your business qualify for financing or insurance with better terms, or may help your business land valuable business partnerships.
How to Get Trade References
You get trade references by doing business with companies that allow you to purchase goods or services and pay for them later. This arrangement is often in the form of “net terms” such as net 30 terms where payment is due in thirty days after the invoice date. (Net terms may range anywhere from net 10 to net 120 or longer. Generally, longer terms are available to established businesses that are considered good customers.)
Note that some companies may require you to make a certain number of purchases before extending credit. That’s commonly the case for startups and for some new clients of the business.
To get trade references (also referred to as trade lines), new businesses may want to seek out companies that offer vendor terms and are open to working with businesses that are less than two years old or don’t have an established business credit record.
Start with your existing suppliers and vendors to find out whether they provide credit. If they do, be sure to monitor your business credit reports to see which ones report payment history. (Nav makes it easy to check and monitor your business credit.) If you don’t have any existing relationships that will allow you to buy on credit, consider working with companies that extend vendor credit.
What Makes a Strong Trade Reference
The most important factor in a trade reference is whether the account has been paid on time. If the supplier offers net-30 terms, for example, the invoice should have been paid before the 30-day deadline. The same is true of net-60 or net-90 accounts; it’s important to pay on time or early.
Other factors that are important include:
- How long has the account been established? Older accounts are more valuable.
- When was the last sale/reporting date? An account that was used one-time years ago won’t provide as much information as one that was used repeatedly over months or years.
- What is the highest amount of credit extended? This shows how much credit the business may be able to handle.
- What is the current balance? Is the business carrying high balances, or do they have a history of using credit carefully.
Of course, new businesses won’t have a lot of long-established credit accounts which is why building trade credit now—before you need it—can be helpful.
Can Trade References Help With Financing?
Good trade references can absolutely be helpful when it comes to qualifying for certain types of small business financing. When filling out a credit application for business financing, you may be asked to provide the names of your vendors or suppliers so your payment history can be verified.
In addition, some of the companies you pay on terms will report payments to business credit reporting agencies. On-time payments on these accounts can help you build business credit. (Dun & Bradstreet’s Paydex score, for example, is heavily weighted toward trade credit experiences.) Strong business credit is one of the factors— along with time in business, revenues and/or personal credit scores— that small business lenders may consider when evaluating applications from entrepreneurs seeking business loans for financing.
Some vendors are willing to accept trade reference letters or will do a verbal verification with your existing suppliers if your business credit scores aren’t strong. Again, this is why they may ask for the names of trade credit references on a credit application. This is more time-consuming, however, so be sure to start building business credit as soon as possible.
Note that trade references are unlikely to be checked when applying for business credit cards. Instead, credit card applications are usually evaluated based on the owner’s personal credit scores. In addition, it’s not common these days for banks to request trade references when extending credit, though you should be prepared to provide these references whenever you apply for financing.
What Is a Trade Reference Example?
Here is some of the information that may be included with a trade reference:
- Customer identifying information (name of business, address etc)
- Credit terms (i.e. net 10, net 30)
- Date account opened
- Open AR balance (AR = accounts receivable)
- Past due balance
- Highest previous balance
- DBT (days beyond terms) – current and previous
- Number of late payments
- Credit limit
- Number of credit transactions
How Trade References Benefit Suppliers?
Trade references can benefit your business in terms of getting credit, but they can also help your business in terms of extending credit and getting paid on time. If your business is going to provide goods or services without being paid in full up front, you are extending credit. As a result, you may get trade reference requests from your customers. Try to accommodate these requests if you can. It helps your customers and it helps other businesses ensure they aren’t taking unnecessary risk when extending credit.
Of course, any time you extend trade credit to your customers it’s important to have them fill out a credit application so you can evaluate their creditworthiness and determine how much risk you are willing to take. Consider checking their business credit file as well. (Anyone can check business credit; you don’t have to get permission from your customers first.) If prospective borrower’s don’t have a strong credit rating you may want to extend a smaller amount of credit until they demonstrate they will pay on time.
You may want to consider reporting your customer’s payment experience to commercial credit bureaus such as Dun & Bradstreet, Equifax or Experian, and/or to the Small Business Financial Exchange. Let your customers know you report to business credit; that’s an incentive for them to pay on time. Reporting will help your customers build business credit.
Mistakes To Avoid With Trade References
One common mistake is to assume that “more is always better.” While you may be tempted to get as many business trade references as you can when you are establishing business credit, if you don’t do business with those companies often, you may not establish a robust payment history and those references may not be as valuable as ones from companies with which you regularly do business.
Another common mistake is to assume that all trade references report to all business credit reporting agencies. That’s not often the case. You may find some companies report to some bureaus but not to all. (Credit reporting is completely voluntary.) You may need to proactively seek out references from companies that report.
Another mistake some entrepreneurs make is to focus exclusively on building business credit, but ignore personal credit. Some lenders, like business credit card issuers, often check personal credit and if you don’t have good or excellent personal credit scores, you may have trouble accessing that type of credit.
Both personal and business credit are important to small business owners who want to qualify for the best small business loans.
Best Practices for Checking Trade References
If your business provides goods or services to other businesses, checking trade references is crucial to helping ensure you get paid on time. The easiest way to do this is by checking business credit on the companies you do business with. (Nav can help.)
Not all companies will report to business credit, so if you must accept trade references in other ways (such as credit reference letters), make sure you verify them directly with the source.
How Are Trade References Different From Trade Credit?
Trade credit is when a business allows another business to purchase goods or services without paying up front. The trade reference – how that customer manages that credit— is the result of that relationship. The two are closely intertwined: you get trade credit and then your payment history determines whether that company is likely to give you a positive trade reference.
Can I Get Trade References If I Don’t Have Good Personal Credit?
The good news is that you don’t have to have stellar personal credit to start establishing trade credit. Some companies that extend trade credit won’t check the business owner’s personal credit reports at all. Others may do a “soft check,” to rule out very low personal credit scores. That means you may be able to secure credit with suppliers even as you work on your personal credit.
How Do I Ask for a Trade Reference?
Often you’ll contact the lender’s credit management department to request a trade reference. If you’re a business owner applying for credit, it’s not a bad idea to check with your vendors or suppliers before you list them as a trade reference on a credit application to ensure you include proper contact information.
Who Can (And Can’t) Provide a Reference
While any business can provide a reference for another business, not all will be accepted by credit reporting agencies or other creditors. Generally, a trade reference must come from another verifiable source. (A supplier can check the business credit report of the source just as easily as it checks the business credit of potential customers.)
Some companies will promise tradelines in exchange for payment, even though no legitimate business (beyond paying for the reference) has taken place between the companies involved. This is considered a form of credit fraud, and if the credit bureaus find out they may remove those references.
What Are Other Options To Improve Business Credit Scores?
While trade references can be a great way to build business credit, they aren’t the only option. A business credit card is another way to build business credit, as most business credit cards report to at least one of the major commercial credit reporting agencies. Many small business lenders also report to business credit as well.
Finally, a Nav Business Boost or Business Loan Builder account can build credit with line reporting.
This article was originally written on October 7, 2020 and updated on July 26, 2023.