Trade References for Business Credit: Everything You Need to Know

Trade References for business credit 

If any of these scenarios sound familiar, you aren’t alone. Businesses across the U.S. have experienced these kinds of issues amid a looming recession, labor shortages and supply chain issues stemming from the Ukraine-Russia War and Israel-Hamas War. 

But companies are still optimistic about being approved for loans and credit. Our research found that 88% of North American companies believe they’ll be approved for loans. Does this hope come from factual evidence or blind optimism? This figure highlights a potential lack of understanding about the factors lenders take into consideration before approving a loan.

One of those factors are trade references. And we’re going to tell you everything you need to know about trade references – what they are, how to get them and how they’re checked. 

A trade reference is a detailed report you need to provide to lenders and creditors. It helps them assess your credit risk and financial history and contains information such as payment terms, credit terms and supplier and vendor relationships. Trade references also benefit you. As someone seeking credit, you need to show your creditworthiness with strong figures, relationships and low risk. 

Trade references are especially important for small businesses because they don’t always have the means to apply for long-term loans that bigger organizations have access to. A company needs to build up a financial history trail, which trade reference reports can do. Businesses can attract multiple vendors to partner with them and fuel growth. Let’s look at a couple of situations where this applies.

Start by looking for companies that offer vendor terms and figure out what kind of net payment terms are acceptable for both parties (i.e. Net 30, Net 60, etc.). Net 30 payment terms is likely the best choice because you don’t have the reputation or relationship to establish extended payment terms like Net 90.

Tap into your existing supplier and vendor relationships and see if they’re open to renegotiating credit or net-term offerings. You should have built up an existing financial history trail that can help you leverage good terms. To do this, regularly check your business credit report.

But just because trade references might sound great on paper, that doesn’t mean you should assume they’re the only thing that creditors or suppliers will look at. Why? Well, trade references can feature biased information. And business credit reports are still a vital part of the approval process.

Adam Stokes, Enterprise Team Manager at Creditsafe, has a lot to say on this. “It’s not always best just to go off trade references. Even after checking the trade references, it can be biased information (i.e. a company will only give the names of people that they’ve worked well for and nothing else). Or I’ve seen in the past where a company owner will give the name of their brother or cousin as a supplier.

There are a couple of other blind spots that trade references don’t account for. Any legal filings aren’t recorded and there’s no way to monitor the company after the trade reference has been done. So, it feels like some businesses will use trade references because they are cheaper than credit reports. If that’s the case, it’s not the way you want to go as a business looking for credit because savvy lenders are always going to do more digging. 

And on the creditor side, you do want to put faith in the customer, but this can’t come at the expense of your due diligence processes. Trade references that are supplied will likely only account for about 1% of a supply chain or customer base. So, reviewing a full business credit report will provide a 360-degree view of a company’s financial health.” 

When you're applying for credit or asking for trade references, lenders will ask for specific information. This could include the name and contact details of the suppliers you've been doing business with, how long you've been working together and whether you've been paying them on time. They might also want to know about any credit limits or outstanding balances you have with them. Basically, they need this information to figure out how strong or weak your finances are and if they can expect you to pay their invoices on time. So, it's important to make sure you provide all the right details to help them make a good decision and extend you trade credit.

Before working with you, suppliers and creditors will check your trade references. These are some of the things they’ll look at.

For all the trade references you provide, you’ll need to make sure they are relevant to your industry. A grocery store is going to have different lead times and processes than a manufacturer, so scatter gunning references aren’t going to be helpful in this situation.

Relevant references will help the supplier or creditor benchmark payment and customer behavior in your sector. But there are exceptions, as Adam points out. “Niche industries (i.e. jewellery) have certain benefits. There’s a small customer base and they have trade groups that all those businesses buy goods from. They tend to all speak to each other and share who and who isn’t paying.

But when you’re looking at an organization that sells to a lot of different industries, you should look at all the industries that they’re paying. Because if the company isn’t paying one business and it gets taken into court, that’s going to have a knock-on effect for brands in those other industries too.” 

The key metric that will be looked at here is the amount of past due payments in dollars. A company that pays only a small number of payments late compared to a company that’s consistently late is like night and day. 

But it’s more than just a surface-level inquiry. You’ll be expected to account for why there are late payments in certain places because it helps to establish a history of payment behavior. 

Remember when we said it’s important to establish payment terms as soon as possible as a new business? This is where it’s going to pay off. A steady payment terms history indicates that you have a strong credit policy (providing the same positive outcomes have been found in a more thorough credit report).

It could even help you negotiate with new and existing suppliers for longer net terms in the future. 

Trade references can have a big impact on your credit scores. They basically show how good you are at handling credit. If you pay your bills on time and don't use too much credit, it's like a thumbs-up for your credit score. But if you're late on payments or don't pay at all, it's like a thumbs-down and your score will likely take a hit. So, having good trade references is key to keeping your credit score in good shape and making sure you can secure the best terms when you need financing or working capital loans.

The credit limit you’ve been given by other vendors will be considered. A good rule of thumb from our research is that a company with a credit limit of $1 million or more has good financial health. 

But it’s not just credit limit that will be reviewed. Your highest, lowest and current credit limit will be looked at to show how disciplined you’re being with your finances. And if there are any discrepancies, further reviews may be needed

How often you place orders and make payments is another factor to be considered. By doing this, creditors will be able to build up a picture of your total revenue and how likely you are to be able to pay them back in the future. 

Tied up with everything else is the amount of time you’ve partnered with other vendors. A new supplier will ask you about how long you’ve been working together and go directly to the source for additional context. A trade reference that proves a relationship of 1 - 2 years indicates good stability, as long as there isn’t any bias.

To sum up this article, Adam Stokes has a list of mistakes to avoid when giving trade references.

“First, make sure that any contact name given isn’t related to you. Secondly, the name of the company that’s referenced is the one that you buy from or have partnered with. As a lot of people are working from home these days, trade references aren’t coming back or being responded to. If you can’t afford to get answers back from the references, then don’t gamble your money on them.

It’s better to invest that money into a business credit report. Because even if you’re spending $40 on a credit report, it’s better than a $4000 debt. Business credit reports will always give more detailed financial data than a reference.”