Key Takeaways
- Trade references are valuable reports that vendors use to assess a customer’s creditworthiness based on their payment history and trade relationships.
- Seek vendors offering net terms and actively engage in transactions to acquire trade references and extend credit opportunities.
- Acceptable trade references are relevant to the seller’s industry, demonstrate consistent payment history, and include credit and payment details.
- Automation streamlines the trade reference check process, saving time, reducing errors, and enabling more accurate and efficient credit management practices.
Introduction
Ever wondered how businesses decide to extend credit? One crucial aspect of managing risk and evaluating creditworthiness is comprehending trade references.
Businesses, like yours, keep meticulous records of every transaction, especially when extending credit to customers. It’s not just about keeping the books straight; it’s about managing risk effectively. But what exactly are trade references, and how can they empower you in your business relationships?
In this blog post, we’ll dive into the world of trade references and explore how they can work to your advantage. By the time you reach the end, you’ll be equipped to use trade references to strengthen your relationships with the people you work with. So, let’s jump right in and uncover all there is to know about trade references, whether you’re a buyer or a supplier.
What Is a Trade Reference?
A trade reference is a crucial report provided by vendors to assess a customer’s creditworthiness based on their past business transactions. It includes valuable information about the customer’s payment history, credit terms, and trade relationships with suppliers and vendors.
For lenders and creditors, trade references are a vital resource to assess the credit risk of potential borrowers. By examining trade references on credit application reports, they gain valuable information about a business’s financial reliability, payment patterns, and the strength of their trade relationships.
But it’s not just the lenders who benefit from trade references. As a customer seeking credit, trade reference reports are equally important for your business. They provide vendors with a comprehensive view of your creditworthiness, helping them evaluate the risks associated with extending credit to you.
Why Should Businesses Ask for a Trade Reference?
Vendors often request business trade references from new customers to gauge their financial reliability. However, as a business, you have the opportunity to proactively share trade references, paving the way for favorable payment terms.
For smaller businesses, trade references play an even more vital role. These businesses heavily rely on trade credit rather than conventional loans. By providing business trade references, they can attract multiple vendors to come on board and fuel the growth of their business. Furthermore, cultivating a strong credit score through positive trade references can open doors to obtaining small loans when needed.
How to Get a Business Trade Reference?
To acquire valuable trade references, you need to engage in business transactions with companies that provide the opportunity to make purchases and defer payment. This arrangement, known as “net terms,” involves paying within a specific timeframe, such as net 30 terms (requiring payment within thirty days from the invoice date).
Net terms can vary, ranging from net 10 to net 120 or longer, with longer terms usually available to established businesses regarded as reliable customers. Now, let’s explore effective strategies for acquiring business trade references based on whether your business is new or already established.
Trade Reference for New Business:
As a new business, it’s essential to seek out vendors and suppliers who are open to working with emerging enterprises. Look for companies that offer vendor terms and are willing to extend credit to businesses that may not have an established credit history or have been operating for less than two years.
Building business trade references with these accommodating partners lays the foundation for future credit growth.
Trade Reference for Existing Business:
Start by leveraging your existing relationships with suppliers and vendors. Reach out to them and inquire about their credit offerings. It’s crucial to monitor your business credit reports to identify which vendors report payment history. Utilize credit monitoring tools like Nav to conveniently check and track your business credit.
If you don’t currently have established relationships that allow you to buy on credit, consider seeking out companies that offer vendor credit and are open to partnering with businesses like yours.
By proactively seeking and leveraging business trade references, you can strengthen your credit profile, enhance your business relationships, and optimize your payment terms for sustainable growth.
What Are Considered Good and Bad Trade References?
Trade references serve as valuable indicators of a business’s payment history, but their effectiveness depends on their relevance to the seller. When offering trade references, it’s essential to comprehend both acceptable trade references, which are positive, and unacceptable ones, which are negative. Let’s examine examples of both acceptable and unacceptable trade references to make informed decisions and understand how they influence the assessment of creditworthiness.
Example of an Acceptable Trade Reference:
Imagine Company X, a retail store specializing in everyday household items and groceries. As Company X seeks to establish a relationship with a new vendor, Company Y, it should provide trade references from companies operating in the same industry or related sectors. For instance, trade references from vendors in the FMCG (Fast-Moving Consumer Goods) industry, such as advertising agencies, payroll service providers, or uniform suppliers, would be highly relevant and effective in this context. These references demonstrate a consistent payment history within the industry, reinforcing Company X’s creditworthiness to Company Y.
Example of a Bad Trade Reference:
To illustrate an ineffective trade reference, let’s revisit the previous example. If Company X had provided a trade reference from their electricity company to Company Y, it would be considered inadequate. This reference lacks relevance from Company Y’s perspective, as it does not align with their specific industry or provide meaningful insight into payment history within the FMCG sector.
For a trade reference to be beneficial from a seller’s standpoint, it should be relevant to their industry, provide credit and payment details covering at least a one-year period, and clearly indicate the credit limit extended to the buyer. Conversely, from a buyer’s perspective, the trade reference should demonstrate consistent and timely payment of all obligations.
By carefully selecting trade references that align with the vendor’s industry and showcase a positive payment track record, businesses can enhance their creditworthiness and foster trust with potential partners.
How to Check Trade References?
If you are a supplier, it is important to check trade references. When assessing trade references provided by new customers, it’s crucial for vendors to conduct thorough evaluations. The following points highlight important factors to consider when checking trade references to gauge a customer’s creditworthiness.
1. Quantity of Trade References
Request at least three trade references to gain a comprehensive understanding of the customer’s payment history and credibility.
2. Relevance
Ensure that the trade references provided are from businesses operating within the same industry. This allows for a meaningful comparison of the customer’s payment behavior with other suppliers in the sector.
3. Duration of Relationship
Inquire about the start date of the customer’s association with their previous vendors. Longer-term relationships indicate stability and reliability. A trade reference spanning 1-2 years is generally considered satisfactory.
4. Credit Limit and Usage
Assess the credit limit granted to the customer by their previous vendors. A higher credit limit suggests a higher level of creditworthiness. Additionally, review the customer’s highest, lowest, and current credit usage to gain insights into their financial discipline.
5. Payment History
Check if the customer has any past due amounts and examine their overall payment pattern. Consistent and timely payments signify a trustworthy customer.
6. Payment Terms
Review the terms of payment outlined in the trade reference. This provides insights into the vendor’s credit policy and any special terms or discounts offered.
7. Order Frequency
Evaluate the frequency at which the customer places orders and makes payments. This helps estimate the potential revenue you can expect from the customer. Additionally, take note of the date of their most recent purchase.
By carefully considering these factors, vendors can make informed decisions regarding a customer’s creditworthiness and minimize the risk of late payments or defaults.
What to Look for While Submitting Trade References to Credit Agencies?
As a buyer, sharing trade references with credit agencies can be a smart move to boost your credit score and build a robust credit profile. So, it’s vital to keep these key points in mind when giving out trade references to an agency.
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Agency Compatibility: Verify if the credit agency you’re planning to submit the reference to accepts credit information from your vendor, as some agencies may have restrictions.
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Real Payment History: Focus on your actual payment history rather than anticipated payments when providing trade references.
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Equal Treatment: Trade references from two vendors with legal ties or shared assets may not receive distinct treatment.
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Vendor Credit File: Check if the vendor providing the reference has an existing credit file, as this might be a requirement for some credit agencies.
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Credibility of Vendor: Ensure the vendor you’re referencing has a reputable track record and is not linked to any fraudulent activities to enhance the authenticity of the trade reference.
How Can Suppliers Streamline the Trade Reference Check Process?
As a supplier, trade references are crucial for the financial well-being of your business. However, manually verifying trade references for new customers during the onboarding phase can be a laborious and time-consuming task.
Mistakes made in this process can lead to significant repercussions. Inaccurate credit decisions raise the risk of bad debt, directly impacting your business’s cash flow and Days Sales Outstanding (DSO).
To streamline the trade reference check process and boost efficiency, consider implementing the following strategies:
1. Implement a Comprehensive Trade Reference Checklist
Develop a standardized trade reference checklist that covers all the essential information and questions you need to ask vendors. This checklist can include details such as customer payment history, credit limit, average payment terms, and any significant payment delays. Having a standardized checklist ensures consistency and helps suppliers gather all the necessary information efficiently.
2. Establish Clear Communication Channels
Maintaining clear and open lines of communication with vendors is crucial for streamlining the trade reference check process. Clearly communicate the purpose and requirements of the trade reference check, ensuring vendors understand what information is needed and the expected timeframe for providing it. Promptly respond to any inquiries or requests for clarification to expedite the process.
3. Embrace Automation and Technology
One of the most effective ways to streamline trade reference checks is by leveraging automation and technology solutions. Implementing a credit management software can automate the entire process. These tools can generate trade reference requests, track responses, and even analyze the data to provide valuable insights. By automating repetitive tasks, suppliers can save time and reduce the risk of human error.
Here's How HighRadius Can Simplify Your Trade Reference Check Process?
HighRadius offers a streamlined solution to simplify and enhance your trade reference check process. With our RadiusOne AR Suite, manual verification of trade references during customer onboarding has become a thing of the past. Our advanced technology automates the credit check process, saving you valuable time and effort.
RadiusOne eliminates the need for manual collection and verification of bank and trade reference details. This reduces errors and makes the process more accurate and efficient. No more tedious tasks – enjoy a straightforward and hassle-free trade reference check.
In addition to automation, RadiusOne provides real-time credit risk alerts and periodic reviews. Stay informed about changes in your customers’ creditworthiness and make proactive credit decisions. This helps you mitigate risks effectively and avoid potential bad debt.
Experience the power of automation and transform your credit management practices with HighRadius’ RadiusOne AR Suite. Schedule a demo to see how RadiusOne can revolutionize your credit management workflow.
FAQs on Trade References
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What is the difference between trade reference vs. credit reference?
Trade reference is a report provided by a vendor that indicates a customer’s creditworthiness based on their past business transactions. In contrast, a credit reference is a document that shows the credit history of those who have applied for a loan.
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How do you ask for a trade reference?
When asking for a trade reference, reach out to vendors or suppliers with whom you have an existing business relationship. Politely request that they provide a trade reference, highlighting the importance of their input in assessing your creditworthiness. Offer any necessary information or forms they may require and express gratitude for their assistance.
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Can you use your bank as a credit reference?
Yes, you can use your bank as a credit reference. Banks can provide valuable information about your financial history, such as account balances, loan repayment history, and credit utilization. Including your bank as a credit reference can strengthen your credit profile and bolster your creditworthiness assessment.
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What to do if you don’t have business references?
If you don’t have business references, there are a few options to consider. Start by building relationships with vendors or suppliers who offer net terms and are willing to extend credit to new businesses. Additionally, you can provide personal references from individuals who can vouch for your character, reliability, and financial responsibility.
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How do I find out my customer’s credit reference?
To find out your customer’s credit reference, you can request trade references from their vendors or suppliers. Reach out to these companies and ask for feedback on the customer’s payment history and creditworthiness. Additionally, you can use credit reporting agencies or conduct a credit check to obtain more comprehensive credit information on your customer.
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What is a trade reference example?
A trade reference example includes the vendor’s contact details and information about the customer’s payment history, credit limit, outstanding balances, terms of payment, and the duration of the business relationship. It provides insights into the customer’s creditworthiness and financial responsibility.
