Trade Reference Definition
Creditors naturally place a higher value on customers with longstanding payment histories. So they often will save their best deals for credit applicants with the best trade references and credit profiles. These credit references for businesses are usually presented in conjunction with a formal credit report.
Trade references are also called credit references, especially by business credit bureaus such as D&B and Experian. Trade references allow credit bureaus to evaluate your creditworthiness based on payment history. 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 be asked to provide trade references for your customers. It helps your customers and it helps other businesses ensure they aren’t taking unnecessary risk when extending credit.
Credit card applications are evaluated based on the owner’s personal credit scores. It is 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. To get around this dilemma, new businesses must start by paying with cash or using a personal credit card. Once the vendor sees that the new business can pay, it will begin extending credit in small increments.
But you’ll have to pay for any product or services in full. Larger and more reputable businesses have established credit policies and may provide your business with some of the best credit terms available. 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.
As a result, these examples of credit references can be less reliable indicators of a small business’s overall financial health. Still, you should take any negative feedback on a trade reference sheet seriously. Great trade references and a good credit profile means you are more likely to receive credit lines from reputable businesses. Of course, you can work with many reputable businesses, even with poor credit.
You do not need to have excellent personal credit to start establishing trade credit. Some companies that extend trade credit will not check the business owner’s personal credit reports at all. Others might do a “soft check” to rule out low personal credit scores.
That means you may be able to secure credit with suppliers even as you work on your personal credit. Companies are more likely to extend credit to businesses they trust. They may request written or verbal trade references from your existing relationships or they may check business credit reports to evaluate your business payment history with other creditors. If your business doesn’t have a business credit history, you’ll want to make an effort to establish business credit.
If you don’t have a payment history because you’re new, no one will extend you credit. But if no one will extend your credit, how do you create a payment history? Let’s look at the other side of trade references — the vendor or supplier who’s submitting payment experiences. There are seven data points that go along with each submission to D&B.