🎉 Tillful is now part of Nav! Learn about business tradelines at Nav
What’s one thing that virtually all business owners have in common? At some point, they need to build their business credit score. Whether for funding, loans, or lines of credit, a better score makes it easier to grow your company. Trade references can help boost your standing, especially as a new business owner or leader.
What is a trade reference, how do you get them, and are there any downsides to reporting your trade references? Let’s answer all of these questions and more:
What is a trade reference?
A trade reference is a reported transaction between a business and a vendor. Trade references have the potential to impact your business credit score and ultimately your ability to secure credit or funding. Factors that contribute to the business’ account standing include 1) how long the account has been open, (2) the account’s credit limit, and (3) the account’s payment history.
Did you know? The big three business credit bureaus are Dun & Bradstreet, Experian Business, and Equifax Business. These agencies can verify trade references—which can be positive or negative—to inform businesses’ credit scores.
According to Dun & Bradstreet (D&B), a trade reference gathers information from the business account to help inform a business’ credit score. D&B considers seven base variables:
- Reporting date or as-of-date
- Manner of payment(s)
- Rolling 12-month high credit (considering the highest amount of credit used)
- Current total amount of money owed
- Current total amount of money past due
- Selling terms of transactions
- Date of last sale
Are trade references and trade lines the same thing? Yes! Trade line is another term for trade reference. Financial jargon can complicate entrepreneurship, but don’t let it scare you away.
Do new businesses need good trade references?
Trade references can be helpful in getting your small business off the ground in the early years. According to the U.S. Bureau of Labor Statistics, 62.1% of businesses that opened in the year ending in March 2018 survived as of March 2021. Anything small business owners and entrepreneurs can do to increase their chances of thriving (not just surviving) may be worth pursuing.
How business trade references can help you
Trade references can be a solid source of information that businesses leverage to build business credit. By demonstrating seamless and timely payment history, a good trade reference acts as proof of the business’s financial responsibility.
Only reputable transactions get reported as trade references, so you don’t have to worry about an unreliable company taking undue action. The source reporting the transaction cannot be anonymous or have any marks of concern. The company must have a good reputation and an established business credit report.
This isn’t foolproof and businesses can still report negative trade references. However, it’s a gate to keep out credit fraud.
Trade references can improve your business credit score even if your personal credit history is subpar. For startups, this can be a helping hand. Plus, if you have improved your credit but are still haunted by previous blunders, trade references can serve as proof you’ve changed.
Be aware of the downsides of trade references
Credit agencies only receive automatic trade references from a small list of companies. Manually reported trade references must be from companies and vendors that are proven to be trustworthy, legitimate, and operating in the U.S. As a result, smaller businesses may have credit histories that appear far less robust than they actually are.
You cannot report all transactions as trade references. Companies you already have a legal or business relationship with are ineligible. For example, you cannot report trades with banks or credit card companies you already work with.
It can take awhile to build up good trade references. Just like any healthy relationship, it takes time to lay down the foundation of trust. Business relationships between a supplier and buyer usually exist for a period of time before the vendor is willing to offer longer payment terms.
Moreover, enough time must pass to demonstrate a longstanding payment history between the two parties and showcase a company’s creditworthiness. If you’re not using other ways to build your business’ reputation and credit, this can make early funding and credit tricky.
Trade references can be negative, so you need to be careful when managing your transaction relationships. One way vendors combat slow pay (aka overdue payments on credited transactions) is by leveraging negative trade references.
The link between trade references and funding
When it comes to obtaining small business funding, having good trade references can be really beneficial. You may be required to supply the names of your vendors or suppliers when filling out a credit application for business funding so that agencies can verify your payment history.
On-time payments to companies that report to business credit agencies can help bolster your business credit score. You may have an easier time getting funding or taking out a business loan.
Factors like how long you’ve been in business, your revenues, your personal credit score as a business owner, and your business credit are common elements that lenders take into account when approving small business funding or loans.
For small business, trade references may not show the full picture
Unfortunately, some vendors have decided to supply positive trade references in exchange for money. This is a form of business credit fraud. Because of these black-hat tactics, some modern lenders and underwriters are increasingly wary of positive trade references, instead shifting their credit risk assessment models to focus on other underwriting data (like cash flow, debt, business credit cards, and more).
Long story short: It’s okay to focus on trade references, but you don’t want to rely solely on them.
Other methods for improving business credit include making timely bill payments, updating business details with major credit reporting agencies, disputing or taking other action on late payments, and regularly submitting financial reports to prove your business is healthy.
How to get and report trade references
To get a trade reference, you need a record of reportable trade credit representing transactions with a company you purchased goods or services from. You can acquire trade credit by organizing transactions with vendors that allow you to pay them later on. Then, pay those invoices before they’re due and maintain a great working relationship with your vendors.
The most common reports are net-30 transactions, or payments made on a 30-day basis. However, this can vary and typically depends on the existing relationship between supplier and customer. For instance, a supplier may request for upfront or net-10 payment from new or young clients with under two years of business experience. On the flip side, longer terms (like net-120 or longer) can accommodate established businesses with a good track record of timely payments.
As a business owner, you can make a trade reference request from a lender’s department of credit management. You will need to supply contact information for the vendor, so double check to ensure you have the correct information.
Alternatively, you can request a vendor report payment history directly to a commercial credit reporting agency. Vendors can also do this on their own, whether the reference is positive or negative.
According to Finance Monthly, “The Dun & Bradstreet Paydex score requires that you have at least three settled trade lines, and the greater the number of settled trade lines you have, the better your score.” The Paydex score is a dollar-weighted indicator showcasing a business’s past payment performance.
FYI: You may need to take steps to open a business credit file with business credit agencies. For example, you need to establish a DUNS number to be entered into the D&B Data Universal Numbering System. For D&N, the CreditBuilder™ Plus tool is the only way to manually enter trade references.
While the logistics can vary, the important thing is to have the transaction details in writing (and keep a good relationship with those you do business with).
Pro tip: Business coach at the helm of Masters of Wealth, LLC Harvey Booker writes, “When you open vendor accounts to build your business credit, ensure that they report to the credit bureaus. [...] If they don’t report, ask for a trade reference and submit it to the business credit bureaus.”
Last word on trade references
For small business owners, trade references can be a helpful tool in a larger toolkit to build your business credit history. However, you don’t want to rely entirely on trade references. To secure funding, a loan, or a line of credit, focus on all the factors that can improve your business credit score and standing. Prioritize solid relationships and take it one transaction, one conversion, and one business milestone at a time.
