Why Trade References Matter

Trade references are used to help businesses make decisions about whether or not to extend credit to a potential customer. Trade references are reports provided by vendors or suppliers a company is doing business with. Trade references are typically collected on a credit application form and act as a character reference for a business’s payment habits.

When asking for a trade reference, you should focus on the below data points:

1. Relationship start date

This is simply the date the company became a customer.

2. Assigned Credit Limit

The maximum amount of open credit the vendor is willing to extend.  If credit limits are set too low, your team will be tied up needlessly reviewing and releasing orders. If they are set too high, you risk overextending credit.

3. Highest amount of credit in the last year

This measures the highest balance the customer had outstanding during a 12-month period with the vendor. For example, a customer has $50,000 of credit with a vendor. Most of the time, their outstanding balance ranges from $25,000-30,000. But for three months, it spiked to $45,000. The $45,000 is reported for this data point in the submission.

4. Total amount owed

Simply the total outstanding balance at the time of submission.

5. Past due total

The aggregate balance that is past due — the vendor’s credit terms define past due. Any balance that remains outstanding past its due date will be considered past due and reported.

6. Credit terms

The terms established when credit was initially issued or the most recent terms.  Credit terms like net 30/60/90 can change.

7. Date of last sale

Reports the most recent customer transaction. This allows creditors to see if a customer is continuing to utilize credit with a specific vendor.

8. Average days to pay

 The average time period is taken by the customer to pay its invoices.

Payment data is a crucial piece of the puzzle, but for a complete picture, it should be analyzed alongside financial statements, liquidity data, and other key credit information. Don’t rely on trade references alone.