Credit manager reviewing trade references

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Before you sign a construction agreement with a customer, you want to ensure that they can — and will — pay according to the contract. One of the ways that construction businesses assess a potential customer’s creditworthiness is by verifying their history with other vendors — known as trade references in the construction industry.

But not all trade references are useful, and they don’t always tell the full story of a customer’s payment practices. In this article, explore some of my “trade reference secrets” learned over decades as a credit manager and consultant for some of the country’s largest building material suppliers. 

Note: This article contains excerpts from Thea Dudley’s credit management course and her book, A Credit Overlord’s Guide to Credit & Collections.

What is a trade reference?

A trade reference may refer to either a report detailing a company’s transactional history with their vendors, or a current or former customer that is providing a reference. Companies that use a credit application in their prequalification process often include a section for applicants to list trade references. 

The construction industry is largely driven by credit decisions, made thousands of times a day across all types of projects, whether residential, commercial, or public. Contractors and suppliers alike effectively finance their customers’ projects in advance, paying for labor, material delivery, and equipment well before they ever have a chance to get paid for it. 

Extending credit is always risky, and can lead to cash flow problems that drive even profitable companies out of business. Trade references can give companies helpful historical context about the risk that they are taking on with a new project or customer.

What to look for in a trade reference

When you are reviewing trade references, you’re looking for “like” professions. If I’m a supply house, I want to see supply houses just like me on there. I want to see my competitors. If I’m a contractor, I want to see other contractors and subcontractors that you’re using.

In other words, I want to see “like” references on there. I don’t want your mom, your preacher, your bait shop, the gas-and-sip. Also, steer clear of using big box stores like Lowe’s and Home Depot; those kinds of places don’t rate. You’re going to want to look for the types of companies that are very similar to you. 

“God may have dibs on where his soul spends eternity, but that does not tell me where he spends his cash.”

I like to see three trade references. Let’s be specific about what makes up a trade reference in our industry that is of value to you.

Ask for current industry trade references. This is a company they are currently purchasing from. 

You should see at least one of your competitors on that list. If you don’t, it may be innocent (“Oh, they don’t want their current main supplier to know they are shopping them”), but more realistically, they have been cut off and looking at you like Cruella DeVille looks at a litter of puppies. 

I had an applicant’s preacher call one of my credit managers to let him know what a great guy this person was and that we should give him a line of credit, as he was “a good, God-fearing Christian.” Well, that is great, but not necessarily a reflection on how he pays his bills. God may have dibs on where his soul spends eternity, but that does not tell me where he spends his cash. 

So, for the record, a person’s mother, friends, preacher, local fishing and tackle shop, or the big box stores are not acceptable trade references.

Most of these should be obvious, but the reasoning behind including the big box stores in that list is that they never respond. I don’t know why they don’t — they just never have in all the years I have been asking for references. Rumor has it they turn their AR over the credit bureaus. Not verified, but take it for what it is. 

“It’s not that I don’t think trade references are important. It’s just an antiquated way to do it.”

Don’t stress over trade references

All this aside: Don’t stress over trade references. And then don’t waste your time contacting all of those trying to get a rating on this customer.

Because again, those credit managers are operating just like you. They’re trying to get money in the door and orders out the door. This is the least important thing in their day. So, if you’re holding up an order or waiting to open somebody’s account based on trade references you’ve requested from another credit department, you might be waiting a long time. 

Related: What does a credit manager do?

Providing a trade reference is the least important thing to do in my day for my company. One of your biggest nemeses is going to be somebody — another credit person just like you — who’s trying to do their job. They’re going to send you a reference request, and they’re going to send a second request, a third request, a fourth request. And they’re going to get angrier, and they’re going to write big in a Sharpie: “Order pending.” 

This just flares tempers. Don’t be that person that sends them. I’ve got to get this order out the door, but running down trade references shouldn’t be your fail-safe. You can’t constantly expect another credit manager to stop what they’re doing to accommodate you. It’s not that I don’t think trade references are important. It’s just an antiquated way to do it. 

If you need something quickly, just say “Hey, I need this.” If they don’t get back to you in a timely manner, move on.

References are just one part of a bigger picture

Contacting trade references can be helpful, but you’re going to get so much more out of pulling credit reports or using data to verify their credit history

Levelset’s Contractor Profiles are a much easier, faster way to get a snapshot of a customer’s creditworthiness. You can see a contractors’ payment history, lien claims, and reviews from other contractors and suppliers.

If a potential customer is hitting a snag, I can search for them real quick and see in real-time what my peers are talking about, what people just like me are saying about our mutual customer. Maybe there’s something going on that can give me insight I won’t see in a typical credit report. I’m going to get the real conversation behind it. It’s a good resource for prequalification.

At the end of the day, you’ve got to remember that, of all the tasks you need to get done in a day, getting trade references is not critical. They’re important, but not critical. Critical is getting my money collected and getting our orders out the door. Everything else is important.

Thea Dudley teaches credit & collections

Join the free certificate course to learn the foundations of credit & collections in construction with 30-year industry veteran Thea Dudley.