Businesses keep a record of all payment transactions they make, including any credit they may have offered their customers. Keeping a record of all credit transactions helps businesses periodically assess their customers’creditworthiness and manage risk better. A customer might also request this information from their vendor/supplier in the form of a trade reference report.
They may then use the report to get a better credit score from rating agencies like Equifax, D&B, and Experian. A good credit score helps establish stronger credit lines with third-party vendors.
Trade reference is a detailed business report of transactions between a customer and seller. It contains the payment history of a customer and helps businesses conduct thorough credit risk assessments. A buyer can use an excellent trade reference report to negotiate better payment terms, such as an extended payment period or a higher credit limit from a new vendor.
Customers can get trade references from vendors with whom they do business on credit. Trade reference reports can be equally important to business credit scores and are used by vendors to evaluate a business’s creditworthiness.
Vendors may ask for trade references from new customers to get an idea of their creditworthiness. And as a business, you could also share it upfront to negotiate favorable payment terms.
Getting a trade reference is even more important for smaller businesses as they depend more on trade credit compared to business loans. It helps them get multiple vendors on board and grow their business while building a good credit score. In fact, good trade references can also help businesses acquire small loans.
If your business has credit lines with vendors, then you can request them to provide you with a report with detailed information on all transactions.
For example, if Company A acquires goods from Company B regularly and has a payment term of net 30 days. Then on requesting the trade reference report, Company B will give all the order details, payment terms, transactions, late payment information, and other relevant information in the report.
Companies with a good trade reference alongside an excellent or decent credit score would always get better payment terms than others. It is important to note that not all vendors proactively share your credit history details or trade references with credit agencies. So, clearly state your trade reference report requirements in advance if you want to build your credit score.
Let’s take a look at some of the major advantages of having an excellent trade reference.
Businesses that do not have a very high credit score or a long credit history can use trade references to get small loans. Trade references act as proof of the creditworthiness of a company.
If a business wants to establish a trade credit line with a new vendor, then sharing trade references of other vendors they have worked with will help. It can make it easier to get better terms, like a longer payment period or a higher credit limit.
Every business wants to have an excellent credit score, especially when they always make timely payments. This can be made easier with trade references that can be shared with credit agencies who, after verification, can update your score.
Since trade references are reports about a business’s payment history, their worth depends on the source. A general rule of thumb is to provide a trade reference that is relevant to the seller. Let’s take a look at a good and bad trade reference example.
Let’s say Company X is a retail store that keeps everyday household items and groceries. It is already working with a number of suppliers to procure items for the store.
So, when Company X wants to work with a new Company Y, then it should give trade references with companies that are in the same industry as Y. Assuming that Company Y is an FMCG company, giving it a trade reference of a hardware company might work but wouldn’t be that effective. Trade references from vendors in industries such as advertising, payroll, uniform supplier, etc. would be more acceptable in this case.
To understand what a bad trade reference looks like, let’s take a look at the previous example. If Company X had given the trade reference of their electricity company, it would have been considered bad. This is because it lacks relevance from Company Y’s point of view.
From a seller’s perspective, a trade reference must be relevant to their industry, give credit and payment details for at least a period of one year, and clearly indicate the credit limit the buyer was given. On the other hand, from a buyer’s perspective, the report must show that they have made all payments in full, and on time.
As a vendor, there are many things to look out for when you check a trade reference provided by a new customer. Let’s take a look at some of the most important items to look out for.
1. Number of trade references: Businesses need to ask for at least three trade references when assessing a new customer’s creditworthiness.
2. Relevance: The trade reference must be of the same industry to get an idea of where your business stands among the other suppliers the customer is working with.
3. Length: The longer the trade reference, the better. Businesses must ask for the start date to get an idea of how long the customer has been associated with a vendor. A period of 1-2 years is considered good enough.
4. Credit limit and usage: The higher the credit limit a customer has on their trade reference, the higher their creditworthiness. It also gives you an idea of how much limit you should offer the applicant. Also, take a look at the highest, lowest and current credit usage.
5.Past due: You should check if the customer has any past due amounts and their general pattern of making payments.
6. Payment terms: Taking a look at the terms gives you an idea if the vendor’s credit policy was strict or not. Also, note any special terms or discounts added to the agreement.
7. Frequency: Check how frequently a customer orders and pays to estimate how much revenue you can expect from them. You should also check when the last sale was made.
You can submit trade references to credit agencies and boost your credit score. However, there are certain things you need to look out for when sending a trade reference to an agency.
1. Does your vendor submit credit information to credit agencies (check specifically for the agency you plan to send the trade reference to) If yes, then the reference you submit would be considered ineligible?
2. Anticipated payments are not counted in trade reference reports.
3. Trade references of two different vendors that are engaged legally or have common assets wouldn’t be considered differently.
4. Most credit agencies also make it compulsory for the vendor providing the trade reference to have a credit file.
5. If your vendor has a bad reputation or is found to be fraudulent, the trade reference might not be considered valid.
Manually verifying the trade references of new customers while onboarding them can be tedious and time-consuming. Any mistakes in the process would mean erroneous credit decisions, which increases the risk of bad debt and, in turn, affects the cash flow and DSO of the business.
HighRadius’ RadiusOne Credit Application can automate the credit check process during customer onboarding. It collects and verifies bank and trade reference details without manual intervention. You also get real-time credit risk alerts and periodic reviews to stay on top of any risks.
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.
A business can check the credit reference of their customers by asking them to submit a credit reference report.
Trade references can be given by businesses that extend credit to customers. Lenders and banks can also give it to those who have taken loans from them.
You will not have a trade reference if you have never taken any loans or done business on credit with a vendor. It will likely make it difficult for you to apply for credit with new vendors, especially if you are a small business.
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