If any of these scenarios sound familiar, you aren’t alone. Businesses across the U.S. have experienced these kinds of issues amid a looming recession, labor shortages and supply chain issues stemming from the Ukraine-Russia War and Israel-Hamas War.
But companies are still optimistic about being approved for loans and credit. Our research found that 88% of North American companies believe they’ll be approved for loans. Does this hope come from factual evidence or blind optimism? This figure highlights a potential lack of understanding about the factors lenders take into consideration before approving a loan.
One of those factors are trade references. And we’re going to tell you everything you need to know about trade references – what they are, how to get them and how they’re checked.
A trade reference is a detailed report you need to provide to lenders and creditors. It helps them assess your credit risk and financial history and contains information such as payment terms, credit terms and supplier and vendor relationships. Trade references also benefit you. As someone seeking credit, you need to show your creditworthiness with strong figures, relationships and low risk.
Trade references are especially important for small businesses because they don’t always have the means to apply for long-term loans that bigger organizations have access to. A company needs to build up a financial history trail, which trade reference reports can do. Businesses can attract multiple vendors to partner with them and fuel growth. Let’s look at a couple of situations where this applies.
Start by looking for companies that offer vendor terms and figure out what kind of net payment terms are acceptable for both parties (i.e. Net 30, Net 60, etc.). Net 30 payment terms is likely the best choice because you don’t have the reputation or relationship to establish extended payment terms like Net 90.
Tap into your existing supplier and vendor relationships and see if they’re open to renegotiating credit or net-term offerings. You should have built up an existing financial history trail that can help you leverage good terms. To do this, regularly check your business credit report.
But just because trade references might sound great on paper, that doesn’t mean you should assume they’re the only thing that creditors or suppliers will look at. Why? Well, trade references can feature biased information. And business credit reports are still a vital part of the approval process.
Adam Stokes, Enterprise Team Manager at Creditsafe, has a lot to say on this. “It’s not always best just to go off trade references. Even after checking the trade references, it can be biased information (i.e. a company will only give the names of people that they’ve worked well for and nothing else). Or I’ve seen in the past where a company owner will give the name of their brother or cousin as a supplier.
There are a couple of other blind spots that trade references don’t account for. Any legal filings aren’t recorded and there’s no way to monitor the company after the trade reference has been done. So, it feels like some businesses will use trade references because they are cheaper than credit reports. If that’s the case, it’s not the way you want to go as a business looking for credit because savvy lenders are always going to do more digging.
And on the creditor side, you do want to put faith in the customer, but this can’t come at the expense of your due diligence processes. Trade references that are supplied will likely only account for about 1% of a supply chain or customer base. So, reviewing a full business credit report will provide a 360-degree view of a company’s financial health.”
When you're applying for credit or asking for trade references, lenders will ask for specific information. This could include the name and contact details of the suppliers you've been doing business with, how long you've been working together and whether you've been paying them on time. They might also want to know about any credit limits or outstanding balances you have with them. Basically, they need this information to figure out how strong or weak your finances are and if they can expect you to pay their invoices on time. So, it's important to make sure you provide all the right details to help them make a good decision and extend you trade credit.
