Trade References

How Trade References Can Help Your Startup Get Financing

New businesses often find it challenging to get financing. Many lenders prefer to lend to businesses that are at least a year or two old and that have strong financial profiles. But if you wait until your business is a couple of years old, you may find yourself missing a key piece of your credit profile: good business credit.

Trade references can help you jumpstart the process of building business credit while helping your startup improve cash flow.

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The importance of building business credit

Business credit is similar to personal credit. Your business may have business credit scores that indicate to lenders and financial institutions how creditworthy your business is.

If you want to take out a loan or even open a business credit card, having a solid business credit history can help. When you first open your business, this may not be top of mind, but there will likely come a day down the road when getting financing makes sense to grow your business. That’s why you need to start thinking about your business credit now.

The thing is, you don’t automatically have business credit. You must build it.

You can build your credit several ways, but one of the easiest ways to get started is with trade references.

What are trade references?

You may work with vendors who extend credit to your business. It’s a bit like the credit card you have with your favorite department store or grocery store; you make purchases and pay for them later.

You might get a trade credit line with your office supply store or the company you buy your inventory from.

Essentially, trade credit allows you to make a purchase and pay for it later. Not only does that give you some leeway with your cash flow, but it also helps you build your credit.

A trade reference is a report that includes your payment history with that vendor. This trade reference may be verbal, in a letter, or reported to business credit bureaus like Experian, Equifax, or Dun & Bradstreet.

They’re important because your positive payment history can help you build your business credit and boost credit scores, and that will qualify you for financial products at great rates. If you apply for a bank loan, you may be asked for trade references. This helps the bank understand how long you have had this credit account, whether you’ve ever paid late, and how much credit you have available.

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How to get a trade reference

It’s fairly easy to get a trade reference, but first, you’ve got to start by having trade credit.

Step one: Get trade credit

The most obvious place to start is with the vendors and suppliers you already do business with. Visit their websites (or call your account rep) to see if trade credit is an option. There are also a number of vendors willing to extend credit to businesses that purchase their products and services, even if your business is new.

You may be asked to provide financial information about your company in the application process. Some vendors will cap how much trade credit you are extended, so be sure it makes sense for your needs.

Be clear on the terms before signing anything. Are there fees or interest on unpaid balances? Do balances need to be paid off each month, or can you carry over a balance?  Many vendors offer net 30 terms, which means you must pay your invoice within 30 days after the invoice date. Some offer shorter or longer terms, and the longer your relationship with the supplier, the greater the likelihood you can get longer terms.

Also, be aware of which credit bureaus the vendor reports to. If the vendor doesn’t report to a credit reporting agency, there’s not a lot of value to you in terms of being able to build your credit.

Step two: Practice smart financial habits

Now that you have your trade credit, you’ll want to use it smartly. When you use that credit, make sure you can afford to pay the balance in full and on time. Know that a late payment can negatively affect your credit scores.

Put your payment due dates on your calendar and try to pay a few days early so you allow time for the payment to be processed.

Step three: Ask for a trade reference

When the day comes for you to apply for a loan, those trade references can be helpful in getting approved for the financing you need.

While your vendors may report your trade credit to credit bureaus, you may also need trade references as part of your application. Don’t worry; it’s usually easy to get a credit reference letter from a vendor for this purpose.

Send a letter to the customer service department, asking them to draft a letter that includes:

  • How long you have had trade credit with the company
  • The terms of your payment
  • Whether you pay on time
  • Whether you have had late payments
  • Whether the company considers your business to be a good credit risk

Allow a few weeks to get a response, and account for this in your timeline for applying for the business loan. Once you receive it, you can include it in your loan application. Typically, banks want to see three such trade references.

Taking out credit with vendors and suppliers is a fantastic way to manage your cash flow and build your business credit. And once you’ve built that relationship over time and paid your invoices by their due dates, you can request a trade reference that can help you get the small business financing you need to grow your business.

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