What is a trade reference & how it helps your business

Did you know your loan agreements might be holding your business back? 

Lenders, vendors, and even insurance providers routinely assess your company’s credit score, which directly impacts your interest rates, credit limits, and insurance premiums.

One of the key factors that influence your business credit score is trade references.

Understanding and leveraging these can open doors to better financial opportunities for your business.

So, how can you improve your business credit score?

This guide aims to help business owners like you strengthen your credit through effective use of trade references.

What is a trade reference?

A trade reference is a report that shows how a business pays its suppliers or vendors.

It can be shared verbally, in writing, or sent to credit agencies like Experian, Equifax, or Dun & Bradstreet.

When a business pays on time, this document helps boost its credit score, making it look more trustworthy.

Why do you need a trade reference?

Having good trade references is important if you plan to open a trade credit account with your vendors.

They act like character witnesses for your business, showing you're dependable in transactions.

Without them, it might be tough to get credit since suppliers could view it as risky.

For example, if you own a new coffee shop wanting to buy beans on credit from a supplier, they'll feel more comfortable if other businesses (which you have previously traded with) can vouch for your reliability and prompt payments.

Trade references are really helpful for both lenders and borrowers when it comes to understanding credit risks.

Lenders use the information to determine a business's financial reliability, how regularly it pays its bills, and how strong its relationships are with other businesses.

On the flip side, having good trade references can make a big difference if you're a business looking to get credit.

They let your suppliers see how trustworthy you are when it comes to handling credit. 

So, it's a win-win—good for your business relationships and great for managing your finances smoothly!

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Having no trade references increases the default risk for suppliers. Discover how you can use credit insurance to mitigate risk. 

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Components of trade reference

When a vendor sends details for trade reference on your behalf, the report includes seven key pieces of information:

1. Reporting date: The date when the vendor reports the customer's payment habits to credit-reporting agencies.

2. Method of payment: business credit card, check, direct bank transfers (ACH), wire transfers, or even old-fashioned cash.

3. Highest credit used in the past year: The maximum credit amount that was utilized over the last 12 months.

Let's say a customer has a $10,000 credit limit with a supplier. Normally, they owe between $3,000 and $5,000.

However, their balance increased to $8,000 for a few months, which is the figure reported.

This information helps other lenders see how much of their credit limit the customer is using.

‍Customers who often use most of their credit might be considered riskier than those who use less than half.

This gives a quick snapshot of the customer's financial strain.

4. Total amount owed: This is the total amount the customer owes the vendor at the time the data is reported.

5. Past due total: This sums up all the overdue money according to the vendor’s rules on when payments should be made. 

6. Terms of sales: These are the payment conditions when the customer gets credit. It covers things like the overall credit limit, payment deadlines, minimum payment amounts, and any discounts for early payment. These terms can get stricter or more lenient based on how reliably the customer pays.

7. Date of last sale: This tells when the customer last made a purchase on credit. It helps creditors see if the customer is still actively buying from the vendor.

Each of these details helps paint a picture of how a customer manages their finances, which is super useful for other businesses considering giving them credit.

How can you get a trade reference?

To get trade references, you generally need to do business with companies that let you buy now and pay later. 

This is often done using terms like "net 30," which means you have 30 days to pay the bill after receiving the invoice.

The specific terms can vary—some may offer 10 days, while others might offer up to 120 days, especially if you're a well-known and trusted business.

So, that puts you in either of the two buckets:

1. Established business

If you have an established businesses in India, begin by contacting your existing suppliers and vendors to ask about their credit terms. 

On your credit application, include the names and contact details of the suppliers you want to use as references. The supplier will then contact them directly to obtain the reference.

It's not mandatory to inform a company that you'll be listing them as a reference, but depending on your relationship with them, you might choose to give them a heads-up.

When picking a supplier for a reference, ensure:

1. You’ve always paid them on time.
2. You’ve had a steady payment history with them for a while.

This helps make the credit application smoother.

2. New business

Starting a new business and trying to establish credit can feel like a paradox.

Without a payment history, it's tough to get credit, but you need credit to build that history. 

Here’s a simpler way to look at it:

Firstly, new businesses in India often need to start by paying in cash or with a personal credit card.

This shows vendors that you’re reliable with payments. After some time, these vendors might start to offer credit on smaller orders. This is your chance to start building trade references by ensuring these transactions are reported to credit bureaus.

Getting trade references isn’t too hard with a bit of forward thinking.

Just remember, it's essential for businesses that want to buy on credit or plan to apply for a line of credit in the future.

Keep your dealings straightforward and consistent, and you'll set your business up for success.

Why are trade references important for businesses?

Here's why trade references are a big deal:

1. They build trust and credibility

Think of trade references as thumbs-ups from other businesses that say, "You can count on this company!"

They help build trust and show that a business is reliable, making others more comfortable working with it.

2. They assess creditworthiness

These references give a quick look at how a company manages its money, such as whether it pays its bills on time.

They act like a mini financial health check for businesses considering a partnership.

3. They strengthen business relationships

Good trade references can make business relationships smoother. T

hey help create a cycle of trust and success with suppliers, customers, and partners, keeping everyone happy.

4. They impact on financing and trade credit

More than just good words, they can open doors to more funding and credit options.

Banks and lenders look at these references to decide how risky a business is before giving out loans.

Strong trade references can also help small businesses get loans when needed.

Trade credit is one way to finance your cash flow. Here are: Six options for funding your small business

How does trade reference benefit Indian suppliers?

When extending credit to customers, it's essential to take a few key steps to protect your business and ensure financial security.

1. Require a credit application: Have every customer fill out a credit application. This allows you to assess their financial reliability and determine how much credit to extend.

2. Check trade references: Assisting your customers with trade reference requests not only supports them but also helps other businesses feel confident about extending credit to you.

3. Start small for new customers: If a customer has a weaker credit score, consider starting with a smaller credit limit. This gives them the chance to build trust by demonstrating timely payments.

4. Report payment behavior: Consider reporting your customers' payment habits to commercial credit bureaus. Letting them know about this practice can motivate timely payments and help them build their business credit. 

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Are your suppliers facing credit challenges? Learn how invoice factoring can boost their cashflow, even with a bad credit score.

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How does trade reference benefit the buyers?

Companies often prefer to work with businesses they trust and see as financially reliable.

To that end, they might ask for trade references from your current partners or check your business credit reports to understand how well you've managed debts with other creditors.

If your business lacks a solid credit history, it's wise to start building one using accounts that contribute to your credit report.

Having good business credit can open doors to better alternative financing options and insurance terms, or it could help you secure beneficial business partnerships.

It's definitely something worth investing your efforts in to boost your business's financial standing and opportunities.

How does trade reference affect your cashflow?

Trade credit really ties into cashflow, no matter if you're the one buying or selling.

For buyers:

1. Payment planning: Align invoice payments with cashflow projections, enabling smoother financial management.
2. Cash conservation: Avoid immediate cash outlays (no need for Cash on Delivery) by deferring payments.
3. Flexible payments: Utilize multiple trade credit lines to stagger payments according to available cash.
4. Early payment benefits: If liquidity allows, seize discounts for early payments to optimize cost savings without straining working capital.

For suppliers:

1. Accrual uncertainty: Customers' unpredictability of payment timings can complicate financial forecasting.
2. Risk of delayed or no payment: Post-delivery, there's a risk of delayed or outright missed payments.
3. Invoice financing: Convert unpaid invoices into immediate cash through invoice financing to alleviate cash tied up in trade credits.

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Learn more: 4 reasons why invoice financing is more beneficial for SMEs than bank credit

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Best practices while using trade reference

Managing trade references well helps build trust and credibility in business deals.

Here are some tips on how to keep your trade credit in top shape:

1. Keep records accurate 

It's crucial to have correct details in your records, like the names of companies, their contact info, and when you last updated the info.

Make sure you're always recording transactions and that these details are up-to-date.

2. Track payments

Pay attention to when payments are supposed to come in and when they actually arrive.

This helps you understand how reliable your trade relationships are. Regularly update these details to reflect any changes.

3. Regularly review and update

Set reminders or a schedule to review your trade references. This keeps your information fresh and relevant.

Document these reviews to maintain accuracy.

4. Look for changes in your partners' status

Monitor any changes in your trade partner's business status.

Updating information like payment histories and reporting dates on time aids in making smart credit choices.

Early identification of problems like missed or late payments, and changes in interest rates allows you to manage credit proactively and maintain a business reputation.

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Learn what every SME owner needs to know about interest rates and the cost of borrowing.

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Enhance your cash flow with trade references

Trade references are a key piece of the puzzle when it comes to figuring out how credit-worthy a business is, and they're super helpful for boosting a company's credit score. 

When businesses use accurate and relevant trade references, they can score better payment terms with their suppliers, get approved for small loans, and even grow their operations.

However, even without established endorsements, you can leverage an often-overlooked asset: outstanding invoices.

With Stenn’s innovative export factoring solutions, you can transform these untapped invoices into immediate working capital, fuelling your growth and keeping your operations running smoothly. 

Ready to take the leap? Discover how Stenn can turn your invoices into cash and drive your business forward. Tap into your cash flow potential today!