Trade references are an essential component for lenders and business-to-business suppliers who must decide whether to extend credit to the applicant. These references are typically in addition to a formal credit report by an established business credit-rating agency such as Dun & Bradstreet. Companies and banks that lend money and extend credit want to ensure that their customers can pay their debts in full and on time. Exemplary trade references are a prime asset that successful companies value as much as profits.
Trade references are generally creditors and suppliers within the industry, as opposed to utilities such as phone and electric service. Primary references, such as suppliers of computer equipment and raw materials, are the most valuable.
Advertisement Article continues below this adStruggling companies that wish to maintain a prime credit rating may become adept at prioritizing their debt and supplier payments. Using cash flow to pay bank loans and larger suppliers while putting off smaller businesses can create a misleading credit profile. By checking large and small references alike, companies eager for new business can save themselves the time and headaches that go into collecting money from recalcitrant clients.
Banks may not report negative payment histories to the national credit bureaus until borrowers are 30 or 60 days late. Some suppliers, especially smaller businesses, do not report client histories at all. This reality makes checking trade references a crucial element when companies decide to extend credit.
Advertisement Article continues below this adMonth-to-month payment histories represent an accurate picture of a business's true financial viability. Even companies with good cash flow may be risk takers at the expense of suppliers.
A typical business credit application will ask for three trade references, according to the Credit Guru website. These are generally creditors and suppliers within the industry, as opposed to utilities such as phone and electric service. Businesses may be able to put off suppliers for a month or two, but missing an electric bill risks a cold, dark office.
Primary references, such as suppliers of computer equipment and raw materials, are the most valuable. Secondary references, such as subcontractors who understand they will not be paid until the main client pays, tend to be less reliable indicators of a business's financial health, although any negative feedback should be taken seriously.
Advertisement Article continues below this adLenders and suppliers generally ask – either by phone or in writing – how long an account has been open, the credit or purchasing limit, and how many times the account has been paid late. Creditors value customers with longstanding payment histories, and they often reserve their best deals for those with exemplary trade references and credit profiles.
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