Businesses must be able to determine the risks they’re taking when extending credit or net terms payment options to a customer. Floating net terms (i.e. waiting 30 days to get paid) impacts their cash flow. There are different ways to determine if a customer is creditworthy and if you should offer them trade credit. One method is to pay for a business credit scores report and another is to check the trade references. The trade references are typically collected in a credit application form.
In this article, you’ll learn all about trade references, including why they are beneficial to your business, how they impact credit limit decisions, and how to get and maintain trade references.
A trade reference is a supplier, vendor, or other business from which you've bought and paid for a service or product. Paying for the product or service is critical to establishing a good trade reference. Establishing trade references is similar to building personal credit, which means you've made no late payments to a supplier.
Not all businesses can be a trade reference. You'll quickly find this out when you fill out an application for a loan or credit. What's considered a trade reference is entirely up to the business approving your application. In some cases, utilities aren't considered trade references. A small business or startup is not always the best reference either.
As a supplier, managing the credit checking process costs your AR team a lot of time. They must get the customer to fill in the credit application, call the trade references, and decide on a credit limit. Even then, it's not risk-free. Floating net terms credit ties up cash flow, and there's still a risk of non-payment. Digital net terms solutions like Resolve manage the entire net terms process for you. Everything from credit checking, net terms financing, to payment processing and reminders. Resolve specializes in helping manufacturers and wholesalers.
As a buyer, it's important to know that trade references may be used in different ways. When you apply for credit terms with a new supplier, the supplier may call your trade references directly, while another supplier decides to use credit reporting agencies such as a Dun & Bradstreet (D&B) business credit report, experian, or equifax to view credit ratings. These can cost between $50 - $150 USD, so you can see why it's easier to check trade references.
If you're a new client, it's a great idea to build business relationships with your suppliers. The more a supplier or vendor knows you, the more likely they are to become a trade reference. They'll be happy to give you a reference letter when another company asks for a trade reference request. Building a relationship means working with suppliers and vendors on a consistent basis, not just once or twice. You begin to rely on them and they on you. That is where the real relationship begins. Just like any good personal relationship, the two of you build trust. As you can imagine, building such relationships takes time. That’s just another way of saying that building trade references takes time. If someone is going to allow you to list them as a trade reference, they want to know you’re credible and that your business is reliable. Gatting 30 day or 60 day net terms from a supplier is much easier than using a business loan to help your cash flow.
In addition to building trust, it’s critical always to pay your supplier and vendor bills on time. If you can pay a little earlier, that’s even better. In some cases, you might not have as many interactions with a vendor. Transactions may take place mostly online, which doesn’t really leave any room for personal interaction. You want to keep your credit account with suppliers in a good place.
However, consistently paying on time will speak volumes to your credibility and will carry a lot of weight. At some point, you might miss a payment due to something outside of your control. If you have a stellar payment history, one missed payment is not likely to damage your relationship with that particular supplier or vendor.
Dun & Bradstreet (D&B) is similar to a credit bureau for businesses. When an entity such as a bank, vendor, customer, or insurance company wants to check a business’ credit, D&B is a great way to do it. Each business that is registered with D&B gets a DUNS Number, a unique identifying number for a business used only by D&B.
Unlike personal credit bureaus, D&B business credit doesn’t happen automatically. It takes some work. To establish a credit profile with D&B, you must first register and get a DUNS Number. Then your vendors and suppliers must consistently submit your payment history to D&B.
Some businesses automatically submit payment experiences to D&B. For those that do not, you’ll need to ask them to submit your payment experiences. In some cases, whether or not a vendor or supplier automatically submits payment experiences to D&B could be a deciding factor in choosing them.
Once you have at least three trade references with D&B, your PAYDEX score can be calculated. The D&B PAYDEX score is like a personal credit score. A good PAYDEX score can mean lower interest rates, lower premiums, and access to credit lines with suppliers and vendors.
Establishing trade references can be crucial to the success of your business if credit is important to you. A history of solid payments shows that you are a low credit risk. Companies will be more willing to extend credit to you for this reason. Lack of trade references can mean poorer credit terms and higher interest rates on loans. Looking for a trade reference template? There are many available for free online.
All the hard work involved with creating trade references must pay off at some point. Otherwise, why do it? Below are three of the main reasons to start and continue building trade references.
On your way to establishing trade references, you’ll create a positive track record of payments. This not only helps attract more trade references but also helps to get loans and lines of credit. Additionally, you’ll keep building a solid business credit profile with D&B.
When creditors are able to look at your business credit history and see that you’ve paid on time and have a number of trade references, their risks are reduced. The more a lender or creditor can see into your payment history, the better they are able to determine your lending level of risk. Basically, creditors are able to build a reliable picture of your creditworthiness.
Reduced risks mean potentially more access to credit. Assuming you have good credit, lenders can better verify that you are a low default risk through your business credit profile. Of course, other factors, such as your business's performance, also determine your access to credit.
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. 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.
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.
This is simply the date that the payment experience is submitted to D&B. Each submission to D&B has a reporting date or as-of date.
Also called the manner of payment, it’s a description of the payment method used by the customer. This might be a business credit card, check, ACH, wire, or even cash.
This measures the highest balance the customer had outstanding during a 12-month period with the vendor. For example, a customer has $10,000 of credit with a vendor. Most of the time, their outstanding balance ranges from $3,000-$5,000. But for three months, it spiked to $8,000. The $8,000 is reported for this data point in the submission.
As a trade reference data point, other creditors are able to determine how much issued credit a customer is utilizing. Customers who utilize close to 100% of their credit may be a higher risk customer than those who utilize less than 50% of available credit.
Simply the total outstanding balance at the time of submission.
The aggregate of balances that are past due — the vendor's credit terms define past due. Any balance that remains outstanding past its due date will be considered past due and reported.
Vendors may take flexibility with this data point. For example, if a payment is only five or ten days past due, it may not be included in the total of past due payments. It's up to the vendor’s discretion whether or not certain overdue payments are included.
The terms established when credit was initially issued or the most recent terms. Terms include the total credit, number of days before payment must be received, the minimum amount that must be received with each payment, and any early discounts.
Credit terms like net 30/60/90 can change. Terms may expand if the customer consistently pays on time. On the other hand, if the customer is periodically late with payments or experiences a decrease in their business’ performance, terms may contract, reducing risks for the vendor.
Reports the most recent customer transaction. This allows creditors to see if a customer is continuing to utilize credit with a specific vendor.
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.
D&B uses a credit system called the PAYDEX score. This score is strictly for businesses, but it is similar to your personal FICO credit score. The PAYDEX score ranges from 0 to 100. A score above 70 is good, with over 80 being a very low credit risk, resulting in some of the most favorable credit terms.
When a business pulls your D&B credit report, it can simply view your PAYDEX score for a quick evaluation of your creditworthiness. Remember, for a creditor to become a trade reference on your credit report, it must manually submit your payment history to the credit bureaus.
Not all submissions are accepted by D&B. From D&B’s website, the following manual submissions are not accepted:
- Businesses legally related to your company
- Credit card companies
- Foreign companies
- Companies that have requested anonymity
- Businesses that have been proven to be untrustworthy
- Companies without a business credit file of their own
The following businesses can be manually submitted as trade references to D&B for verification and acceptance:
- Accountants, CPAs, and payroll services
- Vehicle and equipment leasing agents
- Cleaning services
- Computer repair companies
- Construction/remodeling firms and subcontractors
- Direct mail services
- Freight/trucking/local delivery services
- Furniture stores
- Graphic design companies and printing services
- Marketing companies and advertising firms
- PO box rentals (not the US Postal Service)
- Uniform suppliers
- Utility or gas companies
- Warehouse rentals
How do you get trade references if you are a new business? 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? Seems like a chicken-and-egg problem.
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. At that point, the new business has established a trade reference. The new business also needs to ensure that the vendor is reporting its payment history to the credit bureaus.
Establishing trade references is a must for any business that buys on credit or will be applying for a loan. Building up your trade references is not difficult, and, with a little planning, you can be sure you’ll get the most out of your references.
Just as we should maintain excellent personal credit, business owners should focus on maintaining excellent business credit. However, the two are quite different. It takes work to build business credit since it is not automatically reported to business credit bureaus such as D&B and Experian. But this work can certainly pay off in the form of lower loan interest rates, lower premiums, and better credit terms with vendors and suppliers.
Digital solutions are now popping up that allow businesses to streamline the trade reference credit check as more and more companies are now offering net terms online.
Learn how you can make your trade reference process and net terms management more efficient and effective with technology.