Credit references are the only way your business can build trust with a lender, but you’re dealing with a whole lot more than just a simple credit score. Lenders check all of your credit references with intense scrutiny. It’s important to know the standard methods so you can come out ahead and get the lowest interest rates.
What Is a Credit Reference?
A credit reference is any document that can attest to the credit and financial history of a potential borrower or rental applicant. The most common form of a credit reference is a credit score, but that’s not the only kind. It can also include:
- Asset documentation: Anything that serves as valid proof that you have X amount in the bank or have an X net worth. This includes bank statements, certificates of deposit, stocks, bonds, mutual funds, deeds and titles to cars.
- Financier support: A statement from investors who are supporting your business
- Character references: Letters from knowledgeable sources like friends, family, employers and businesses with whom you’ve previously worked
For personal credit, credit letters are often viewed as the weakest form of credit references, while credit scores, asset documentation and financier support are generally viewed as strong credit references. In the world of business credit, it’s a different story. Trade references, or character references from other businesses with which you’ve previously worked, are extremely common and very valuable. Lenders usually have a specific set of questions to ask when checking trade references.
Can’t I Just Use a Credit Score?
Unfortunately, traditional credit scores like FICO credit scores aren’t very helpful to businesses unless you plan on using your personal line of credit to borrow money. Most small businesses don’t have credit scores, especially if you’re still a startup. Even then, your business credit score is probably low because it’s not as storied as the personal credit you’ve been building your whole life. Some businesses struggle financially during the early years and don’t have many assets.
If that’s the case, it’s important to find excellent trade references, but to find the best ones, you should know what credit reference questions your potential lender is likely to ask and if the answer will be favorable.
Checking an Asset Documentation Credit Reference
Lenders check your asset documentation in a very specific way. Typically, they’ll look at your two most recent statements for any account you submit. If you’re taking out a mortgage on a commercial space, lenders legally have to verify every single deposit. This won’t work if your funds are untraceable (i.e., you’ve cashed your paychecks and paid your bills in cash). Cash deposits can taint an entire account, making it completely unverifiable.
Lenders will also look at any overdrafts or flags for non-sufficient funds, so don't ever accidentally withdraw more cash than you have.
Checking a Trade Reference
When checking your business credit references, a lender is going to look at the validity of your reference. The best business trade references include accountants, freight or delivery service providers, landscaping companies, lawyers, advertisers, payroll services, marketing service providers, software developers, parts and material suppliers, uniform suppliers and website hosting companies.
The worst business trade references include banks, insurance companies, real estate companies, credit card companies, businesses legally linked to you, companies without business credit and foreign companies.
Lenders will have some questions to ask when checking trade references, so you should make sure that reference letters include certain information. They’ll likely need three references and will immediately examine your business relationships. Lenders will check:
- Credit highs and lows in the past year
- The current amount
- The terms of your deals (be it 2%, 10 net 30, net 90, etc.)
- Past due amounts
- General payment experience
- Frequency of sales
- Length of relationship
Following Up With Credit Reference Questions
Even if you provide a good reference, odds are that your lender will have a couple additional questions to ask when checking trade references. Credit reference questions might include:
- How long has your company worked with the reference?
- What is the existing credit limit?
- Have there been any late payments, and how late were they?
- Is there a pattern to late payments?
Lenders may also need additional information for asset documentation, so be prepared to have all hands on deck.