Understanding How Trade References Work

Businesses must be able to determine the risks they’re taking when extending credit to a customer. There are different ways to determine if a customer is creditworthy. One method is to look over the business’ financials and another is to check its trade references.

In this article, you’ll learn all about trade references, including why they are beneficial to your business and how to get and maintain trade references.

What Is A Trade Reference?

A trade reference is a supplier, vendor, or other business from which you’ve bought a service or product … not just bought but also paid for. Paying for the product or service is a critical part of establishing a good trade reference. The process of establishing trade references is similar to building personal credit.

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 completely up to the business approving your application. In some cases, utilities aren’t considered trade references.

How Do I Establish Trade References?

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 a Dun & Bradstreet (D&B) business credit report.

When someone looks into your trade references, they’re looking for a history of on-time payments. This means the history needs to be there. Maintaining a good relationship with a supplier or vendor has its benefits in establishing a payment history.

If a business pulls a D&B credit report, it may or may not see one for your business. Even if you do have a credit report, it may not have any trade references on it, despite the fact that you’ve been making on-time payments to several vendors.

The reason trade references may not be on your business credit report is because none of your references have reported your payment history to D&B. Unlike with personal credit where payments to creditors are automatically reported, business payments must be manually reported. This means you’ll need to ask that the business periodically sends in your payment history to D&B. Also, if you know a business does not report to D&B, you may want to consider using another supplier or vendor.

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.

Trade References and Credit Scores

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
  • Banks
  • Credit card companies
  • Landlords
  • Foreign companies
  • Companies that have requested anonymity
  • Businesses that have been proven to be untrustworthy
  • Companies without a business credit file of their own

New Businesses

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 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.