What Is a Trade Reference on a Credit Application?
Credit applications for businesses are much like credit applications for individuals. The potential lender wants to ensure that the business is financially healthy enough to repay its debts. When completing an application for credit, a business may be requested to provide trade references. Trade references are as important to a business as its bottom line.
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What is a Credit Reference
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A trade reference is a credit reference for a business. In essence, a trade reference is a supplier. Terms and conditions revolve around the way a supplier allows a business to purchase goods or services from them. Many times it is on a 30-day note, meaning that payment for anything purchased from a supplier comes due 30 days after the sale occurs.
The Number of Trade References Required
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A credit application will usually ask for three trade references. These can be references that are within the industry, such as suppliers, or outside the industry. It is recommended that at least one trade reference be from within the industry that the business itself is in.
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Primary and Secondary References
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Trade references can be primary references, or ones that service the business directly, or they can be secondary suppliers. Negative references with primary suppliers are more damaging than those with secondary suppliers, though any negative reference is damaging.
How Trade References Work
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Trade references are a necessity as most businesses have open supplier accounts. These accounts are usually not reported to credit companies as are other open lines of credit, such loans. These are generally not reported positively or negatively until the account has gone bad and collections activities have begun. Even then some suppliers do not file reports. Trade references are a way for lenders to gauge a business' true financial health.
How Lenders Assess Trade References
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Lenders will contact trade references and obtain the same information about these accounts as they would for any other open line of credit. This includes the length of time the account has been open, the credit limit, and the number of times it has been paid late. These accounts are just as good or as damaging as anything on your personal credit report.
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