How Trade References Impact Your Business Credit

Nothing determines your chance of receiving future credit opportunities or whether or not an entity should do business with you like the health of your business credit report. Your business credit report is essential in securing your future funding, can impact your chance to do business with certain suppliers and vendors, determine your insurance and loan rates, and help or hinder you in being able to rent or buy building space. Your business credit report can act as an opened door or a closed door to all of the other business relationships you’ll need to establish in order to grow your business.

Trade references are just one piece that makes up the puzzle that is your business credit report. At its base, a trade reference is a detailed log of credit transactions between a customer and seller (business and a vendor or supplier). It shows credit payment history, both positive and negative, of a customer to a business. In order for this payment history to show up as a trade reference on your business credit report, the business you made payments to has to report it to a business credit bureau.

So, how do trade references impact your business credit report and score and potentially future business relationships? Let’s find out.

What Are Trade References?

As mentioned above, trade references are a record of credit payment transactions, positive and negative, between a business and a customer that the business reports to a business credit bureau. Once your business has received credit and paid it back to a business, that transaction history is eligible to become a trade reference on your business credit report. Again, a trade reference is one piece of the entire credit report puzzle. Trade references also aid in calculating your business credit score.

Any vendor or supplier to a business can be used as a trade reference, as long as that vendor or supplier business reports the trade reference to the business credit bureaus. Vendors and suppliers are quick to report when their business customer doesn’t make their payments in full or on time to a business credit bureau to help ensure that other businesses know that that particular business is potentially in financial hardship or can’t be financially trusted to pay back credit. However, a lot of vendors and suppliers may not report positive trade references, so it’s important that if you want that good credit transaction history to show up on your business credit report, that you ask that particular business to report it to a business credit bureau.

Types of Trade References

Trade references, although all simply a record of credit payments from a business to a customer, can come from a variety of businesses and financial entities. Here are some examples of trade references that may show up on a business credit report:

• Supplier trade references: These references come from suppliers who have provided goods or services to the business. They typically provide information about the business's payment history and the quality of the products or services received.
• Bank trade references: These references come from the business's banking institution and provide information about the business's creditworthiness, including credit history, account balances, and the ability to repay debts.
• Trade credit references: These references come from other businesses with whom the business has established credit relationships. They can provide information about the business's creditworthiness and payment history.

Why Should Businesses Ask for a Trade Reference?

Businesses can take the initiative to offer trade references to vendors, establishing their financial trustworthiness and potentially securing better payment conditions. This proactive approach is particularly beneficial for smaller enterprises that depend more on trade credit than traditional loans. By presenting solid trade references, they not only encourage more vendors to engage but also enhance their business growth prospects. Additionally, maintaining a robust credit rating through reliable trade dealings can facilitate access to smaller loans when necessary.

How Suppliers Can Avoid Checking Trade References

For suppliers, the credit verification process can be time-consuming for the AR team. From handling credit applications to contacting trade references and determining credit limits, the process requires effort and isn't without risks. Offering net terms credit can strain cash flow and may lead to non-payment issues. Digital solutions like Resolve streamline this process, handling everything from credit verification to payment reminders. Resolve is particularly adept at assisting manufacturers and wholesalers.

How Trade References Affect Your Business Credit Report

Trade references can have a significant impact on a business credit report. Positive trade references can help establish the business's creditworthiness, while negative references can harm the business's credit score and ability to obtain credit. Here are a few ways in which trade references can affect your business credit report:

1. Creditworthiness: Trade references can provide lenders and credit reporting agencies with information about the business's creditworthiness. Positive trade references that indicate a strong payment history, reliable products or services, and good relationships with suppliers and customers can help establish the business as a good credit risk.
2. Business Credit score: The information provided in trade references can affect a business's credit score. Late payments, missed payments, or other negative information in trade references can harm the business's credit score and make it more difficult to obtain credit in the future.
3. Approval for credit: Lenders and credit providers, including vendors and suppliers offering credit terms to a customer, may review a business's trade references when deciding whether to approve credit. If the trade references are positive, the business is more likely to be approved for credit. However, if the trade references are negative, the business may be denied credit or offered credit on less favorable terms.
4. Interest rates and terms: If a business is approved for credit, the interest rates and other terms of the credit may be affected by the information in the trade references. Positive trade references may result in lower interest rates,, while negative references may result in higher interest rates and less favorable terms.

Benefits of Positive Trade References

You’ve learned that positive trade references can improve your business credit report and that negative trade references can harm it. But what are some specific benefits you can expect if your business credit report contains positive and strong trade references? Here they are:

Improved Creditworthiness: A strong trade reference history shows that your business has a good track record of paying bills on time, which can improve your creditworthiness to other businesses and lenders. This can make it easier for your business to obtain loans, lines of credit, and other forms of financing.

Higher Credit Limits: Strong trade references can also help a business obtain higher credit limits from suppliers, which can be critical for businesses with high operating costs or those that need to purchase expensive inventory. A strong history of making payments in full and on time is a good indicator to lenders and other businesses that you can be trusted to do the same in the future.

Better Payment Terms: Suppliers may also be more willing to offer better payment terms to businesses with strong trade references. This could include longer payment windows or lower interest rates on loans. This just goes to show that even though you are borrowing money on credit, if you can pay it back on time and in full, you will be rewarded in the future with potential savings. Good financial behavior doesn’t go to waste.

Increased Trust: This may seem like an obvious one, but many don’t think about it. A strong trade reference history can also increase trust between a business and its suppliers. This can lead to better relationships and more opportunities for collaboration and growth. Trust is a positive side effect of being consistent in payments.

Competitive Advantage: In some industries, having strong trade references can be a competitive advantage. For example, if two businesses are bidding for a contract, the one with stronger trade references may be more likely to win the contract due to its stronger financial position.

Disadvantages of Negative Trade References

If a business is late on credit payments or doesn’t make payments in full, the other business or vendor/supplier can report the payment history to the credit bureaus. This will still show up as a trade reference, but will reflect negatively on your business credit report. Here are the drawbacks of having negative trade references on your business credit report:

Lower Credit Score: Negative trade references can negatively impact a business's credit score, making it more difficult to obtain financing and credit. A lower credit score can also result in higher interest rates and less favorable loan terms. Negative trade references weigh heavily into how your business credit score is formed.

Reduced Credit Limit: Negative trade references can cause suppliers and lenders to reduce the amount of credit extended to the business. This reduction in credit limit can limit a business's financial flexibility and ability to grow. Businesses are leary to extend a higher limit if the business they are lending to has a negative payment history.

Limited Financing Options: With negative trade references, a business may have limited financing options and may be forced to seek out higher interest loans or funding from less reputable lenders.

Loss of Credibility: Negative trade references can damage a business's reputation and credibility with suppliers, lenders, and potential customers. This can make it difficult for the business to establish new relationships and attract new customers.

Increased Risk of Default: Negative trade references can increase the risk of default on loans and credit accounts. This can result in legal action, collection efforts, and damage to the business's credit score and reputation.

How To Build Strong Trade References

Building strong trade references on a business credit report is crucial for any business looking to establish creditworthiness and credibility with potential lenders or suppliers. Here are six ways to build strong trade references:

Establish relationships with vendors and suppliers: Establishing relationships with vendors and suppliers is essential for any business. Vendors and suppliers don’t simply extend credit to a business. The customer first has to have a relationship with the business through consistent and timely payments for a good amount of time. Make sure to pay all invoices on time and build a reputation for reliability and dependability.

Utilize credit accounts: When opening a credit account with a vendor or supplier, make sure to use it regularly and make timely payments. This will help to establish a positive payment history and show that your business is a good credit risk.

Apply for a business credit card: Applying for a business credit card can be an excellent way to establish trade references. Make sure to pay off the balance each month and avoid late or missed payments.

Monitor your credit score: Regularly monitoring your business credit score can help you identify areas where you need to improve and address any errors on your credit report.

Seek out positive feedback from customers and clients: Positive feedback from customers and clients can be an excellent way to build trade references. Encourage satisfied customers to leave reviews on your website or social media pages. If you have established credit with them, ask them to report it to the credit bureaus as well.

Build relationships with other businesses in your industry: Building relationships with other businesses in your industry can help you establish trade references and provide opportunities for collaboration and growth. Attend networking events, participate in industry associations, and seek out opportunities to connect with other businesses.

Can You Turn Your Trade References from Negative to Positive?

The short answer is yes. However, it takes time, consistency, and effort. The good news is that it’s not too late to change your trade references around from negative to positive. Here are some strategic things you can do to help you turn things around:

1. Simply make credit payments on time and in full each month. This one may seem obvious, but it is at the core of a positive trade reference. Making payments on time and in full consistently not only positively impacts your trade references, but your overall credit report and credit score as well.
2. Make good on past-due accounts. You have the ability to negotiate with other businesses that you have past-due accounts with. Some are willing to strike some sort of deal in exchange for payment in full across a few months. An example of this is paying in full across 6 months in exchange for them to remove any negative remarks or delinquencies from your account.
3. Ensure that any vendors or suppliers that you have or have had positive trade references with reported them to business credit bureaus. This ensures it is on your business credit report. Some don’t report them themselves, so you may have to reach out on your own and request they do it themselves.

Overall, trade references are an important factor in a business's creditworthiness and ability to obtain credit. It's important for businesses to establish positive relationships with suppliers, customers, and other partners to build a strong credit history and improve their credit score.

Starting out strong is the best thing you can do when it comes to trade references. Interested in learning about the health of your own business’s trade references? Get started here.

Bottom Line

Maintaining stellar business credit is as crucial for entrepreneurs as having excellent personal credit. Yet, they are distinct. Building business credit requires effort, as it isn't automatically relayed to business credit bureaus. This dedication can lead to benefits like reduced interest rates on loans, lower premiums, and favorable terms with vendors.

For small business proprietors, trade references are part of a broader strategy to cultivate a business credit history. Relying solely on trade references isn't advisable. To obtain financing or credit, concentrate on all aspects that boost your business credit score. Emphasize strong partnerships and progress step by step, through every deal, interaction, and business achievement.

Frequently Asked Questions

What is the difference between trade reference vs. credit reference?

Trade reference is a report from a vendor detailing a customer's creditworthiness based on their past business dealings. On the other hand, a credit reference documents the credit history of loan applicants.

How do you ask for a trade reference?

To request a trade reference, approach vendors or suppliers you've previously done business with. Respectfully ask for a trade reference, underscoring how crucial their feedback is for assessing your creditworthiness. Provide them any essential forms or information, and thank them for their cooperation.

Can you use your bank as a credit reference?

Absolutely. Banks can offer valuable insights into your financial track record, like account balances, loan repayment patterns, and credit usage. Using your bank as a credit reference can enrich your credit overview, reinforcing your creditworthiness.

What to do if you don’t have business references?

If lacking business references, focus on building ties with vendors or suppliers willing to grant credit terms to emerging businesses. You can also present personal references from people who can attest to your character, dependability, and financial prudence.

How do I find out my customer’s credit reference?

To discern a customer's credit reference, ask for trade references from their vendors or suppliers. Connect with these entities, inquiring about the customer's payment behavior and creditworthiness. Alternatively, credit reporting agencies or credit checks can yield broader credit data about your customer.

About The Author

Ashley Davison

Director of Operations, Credit Saint LLC

Ashley is currently the Chief Operating Officer for Credit Saint, previously working as a Logistics Coordinator at Ernst & Young. She is currently working toward an Executive Leadership Certificate from Cornell University.

With a degree in education, she is eager to teach the world everything she knows and learn everything that she doesn’t already know! Ashley is a FICO® certified professional, a Board Certified Credit Consultant, Certified Credit Score Consultant with the Credit Consultants Association of America and holds a Fair Credit Reporting Act (FCRA) Compliance Certificate.

Articles by Ashley Davison

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