What to Ask and Look for When Checking References
Trade references* are valuable sources of information for businesses that extend credit (whether it be funding, goods, or services) to other businesses, so requesting them on your credit application is highly recommended.
Having an idea of how the applicant treats other companies they work with will give you some much-needed insight into how the company is run, and whether or not they are responsible when it comes to paying their bills.
In fact, once you have the applicant’s trade references, it not only pays to check them once at the onset of their relationship with your business, but regularly and often so you can stay informed and prepared should they unexpectedly face a cash flow problem.
How Many Trade References Are Enough?
Historically, three trade references was the default number listed on credit applications, but the problem with this is that many applicants would just keep a list of their three top references on hand when required. By asking for four references, it makes the applicant look a little deeper and it makes it a little harder to hide from their shaky past (if they have one).
Are They Primary or Secondary Suppliers?
Businesses always pay their primary suppliers first, so ask the applicant which references listed are primary and which are secondary. If the secondary suppliers are always paid on time, then that is a better representation of the applicant’s responsibility to paying their debts.
This same rule applies to local suppliers as well. The closer they are to the applicant’s business, the sooner they typically get paid, so keep the location of the references in mind as well.
Request at Least One Reference From Your Industry
Businesses that fail to pay a supplier will try to escape that supplier by finding a quick replacement. If you request at least one reference for a company within your industry, you may find out that your business is replacing one that the applicant left hanging.
Ask for Older References
The longer the applicant has been dealing with their trade references, the better. Ideally, you should ask for references that have been dealing with the applicant for at least two years if possible.
Obtain Additional References From the Trade References
When speaking with the trade references, inquire as to what references the applicant provided when applying for their services. This will give you an additional set of references you can call that the applicant may not want you to know about.
Compare High and Low Credit Amounts
Knowing how much credit other suppliers have granted the applicant can help you determine how much credit you should extend, but it can also be a valuable warning sign as well. If the applicant is applying for a much higher amount with your company than they did with their references, it might be a sign that their company is experiencing cash flow problems.
Checking trade references is an important component in an effective risk-reducing strategy. Follow these steps and you will be able to vet your applicants, which will in turn help your company grow more successful through engaging in better partnerships.
*Trade References will be added subject to D&B ® verification and acceptance. Please see http://www. dandb.com/glossary/trade-references/ for eligibility, process and other information regarding Trade References.