Trade references are normally obtained on your credit application and checked at the time of setting up of a new customer/applicant.
It is a good practice to check references even at a time when an established customer starts to show signs of financial stress or changes their buying or payment pattern. A periodic check on trade references is recommended on customers those contribute to the cash flow of your organization. Do not be surprised if you uncover something unexpectedly! Moreover it also shows that you care about your exposure and that you monitor it regularly.
The following is a checklist of things to ask and look for while checking the reference provided by the applicant for credit.
It is a normal practice to ask for three (3) trade references on a Credit Application. Over the ages this has taught the average customer looking for credit to walk around with their best three references while applying for credit. What if as creditors we ask for four or more. It is a subtle way of forcing the applicant to look for and supply you with one or two more suppliers with whom they have a healthy business relationship.
Find out if the reference provided is a primary or secondary supplier to the applicant. Generally we tend to give preferential treatment to our Primary suppliers on which our business depends. Thus we also end up paying them first. Checking whether the reference is a primary or secondary supplier to the applicant might help reduce that particular anomaly.
Ask for at least one reference from your industry. It will help you in ascertaining whether they have abandoned one to now join the other, the other perhaps being you.
Again local suppliers tend to get paid first. Finding out the location of the trade reference could provide some insight into the payment practices of the applicant.
Try and ask for trade references where the applicant has had trade dealings for at least one to two years.
Find out if the references provided are related parties. You might be getting a biased reference. Also, upon insolvency 'related party transactions' are viewed as 'non-arms length' transactions. The remedies for these transactions are worth investigating.
When speaking to one or more of the references provided to you on the credit application try finding out the trade references that were provided to these references by the applicant, at the time that the applicant filled an application for credit with these trade references. Then call these references. This will perhaps give you a more meaningful insight into the payment habit of the applicant.
The amount given as high credit to the applicant displays the exposure and confidence that the supplier had in the applicant. The figures can also be used to judge and set your own limit with the applicant. If the amount of credit sought by the applicant is significantly higher than the amount indicated by the references then perhaps you might want to proceed with caution and the case might warrant further investigation.
This amount would especially be of significance and concern if during the peak season of the applicant the amount current were relatively low. This implies that you should also know the business cycle of the applicant to aid your analysis.
This will trend the payment habit of the applicant and give you a rough aging analysis against the terms as discussed next.
Find out if the applicant has any special terms with the references provided. Also, find out if the reference gives any special discounts like 2%10 Net 30. If so, then does the applicant avail of such discounts or abuses it by taking the discount and still paying late.
12. General Payment experience:
How has the payment relationship been over the period of their business partnership? Slow 30, Slow 45, Slow 60 …satisfactory, unsatisfactory excellent etc might be some of the typical responses.
13. Length of time sold:
This would indicate the duration of the relation ship of the applicant with the reference that you are checking.
14. Last Sale:
It is important to know if the applicant is a regular customer of this Trade reference that is provided to you. It could be just a one time or a short and sweet relationship that the applicant had with this supplier.
15. The Yellow Pages:
Study the 'heading' under which your applicant is listed in the Yellow Pages and then call some of the others listed under the same heading to find out more about the applicant. This will be of special value if the customer is out of town or even in a different country.
Note: Yellow Pages are now available online via the Internet.
16. Credit Group/Association meetings:
Valuable information regarding the credit worthiness of the applicant can be picked up at Credit Group or Association meetings.
Just as a tip, if you were checking references other than the ones that were provided to you on the credit application a good disclaimer on your credit application would address that condition. A disclaimer that would indicate that, you will be able to check the references provided to you on the credit application and others that become available to you or you become aware of during the credit review process and from time to time. A good idea would be to review your disclaimers on your credit application in light of the above with your legal counsel.
Thus, trade references help in analyzing the applicant. It also aids in setting limits and determining your exposure. Trade references are another avenue to monitor accounts during the course of your business journey with them. It all depend on how creative you are in using this valuable resource of credit analysis.
Credit Guru.com is designed to provide the credit community with timely and useful information to help you make those tough credit decisions. Please visit this site as often as possible.
Copyright © 1999-2013 CreditGuru.com a Div. of Credit Guru Inc. | All rights Reserved