What is a Trade Reference?

Definition: A trade reference is a contact or firm that had a fruitful business relationship with the beneficiary and generally used to increase his creditworthiness in front of a third party. A trade reference is commonly a kind of judgment about other party’s ability to fulfill a commitment.

What Does Trade Reference Mean?

Trade references can be used in a wide range of business situations but they are mostly seen as requirements asked by credit suppliers. Banks, lenders ad suppliers that grant credits demand trade references to their customers. Although it is impossible to foresee if a person will pay a debt within the expected terms, information about past behavior is often used as a good predictor.

The reference itself can be as simple as a name with its correspondent contact information. In this case, the lender calls to that name and asks some questions that aim to verify the credit record of the potential borrower. In other cases, the requirement is a letter with the opinion, precise data about the past or present credit and complete contact information.

A trade reference should come from a credible individual or entity, not closely related to the beneficiary. It is not very valuable when a relative acts as a reference because there might be personal interests distorting the actual information.

Example

Mr. James Gordon plans to start a new business venture. He will buy clothes to a large manufacturer and distribute them to small stores. The firm demands a minimum amount of 100 items per purchase so Mr. Gordon needs to make the initial purchase on credit.

The manufacturer is asking for a trade reference before granting the credit line. Mr. Gordon remembered that a car seller could be a good reference because his car was purchased through a four-year loan. The manufacturer contacted the seller, who properly informed that Mr. Gordon certainly borrowed an amount of money for the car and he assured the company that each pending payment was timely and entirely covered.