Trade References & Credit Checks Revisited

Why written trade references fail

Most businesses that ask for trade references accept a written letter or email. This is nearly worthless. Consider the selection dynamics: the applicant chooses which references to provide, so they will naturally nominate their most favourable suppliers. Those suppliers, knowing their client has nominated them, are unlikely to send a damaging response in writing — it creates legal risk, awkwardness, and rarely serves their interests.

The result is that virtually every written trade reference is positive. You learn almost nothing. The reference might say "ABC Pty Ltd has been a valued customer for three years" — which tells you nothing about whether they pay on time, whether they have ever gone significantly overdue, or whether the reference-giver would extend further credit to them today.

Call the reference instead. A phone conversation allows you to ask direct questions, hear the tone of the responses, and pick up on what is not being said.

Conducting the reference call

Prepare four or five specific questions before calling. The following questions typically yield useful information:

• "Has this customer ever gone meaningfully overdue on your account?" — Listen for hesitation as much as for the answer.
• "When they have been overdue, did they respond promptly when you followed up, or did they require persistent chasing?" — The difference between a slow payer who communicates and one who goes silent is significant.
• "Have you ever had to send a formal letter of demand or refer the account to a third party?" — A direct question that is hard to answer vaguely.
• "What is the largest outstanding balance you have been comfortable extending to them?" — This gives you a benchmark for what credit limit others have used successfully.
• "Would you extend credit to this business again today?" — The answer to this question, and the speed with which it is given, is often the most informative part of the call.

A guarded or slow response is itself information. If a reference says "we've had our moments" or "they've come good eventually" rather than giving a clean positive, weight that accordingly. A reference who genuinely has no concerns will say so clearly and without prompting.

Reading a commercial credit bureau report

Commercial credit bureau reports — available from providers such as Equifax, CreditorWatch, and illion — typically include several categories of information. Understanding each section helps you read the report accurately rather than just scanning for a summary score.

Company identity and registration: confirms the legal entity name, ACN, ABN, registration status with ASIC, and registered address. Verify this matches the entity you are dealing with — particularly if the customer is a company group with multiple entities.

Court judgments and defaults: any judgments recorded against the company in court proceedings, and defaults lodged by other creditors. A judgment or default is a serious signal — it means another creditor pursued the matter formally. Check the date and the amount. A single old default that has since been satisfied is less concerning than a pattern of recent defaults.

Payment behaviour data: some bureaus carry trade payment data reported voluntarily by other creditors. This shows how the applicant pays its suppliers — average days to pay, whether payments are consistently late, and by how much. This is the most practically useful section, though it depends on how many of the applicant's creditors report to the bureau.

Director history: details of the directors of the company and their history with other companies. Directors who have been associated with multiple insolvencies are a meaningful risk indicator.

Related entities: associated companies through common directors or ownership. A company that is clean itself but connected to a recently wound-up entity warrants further enquiry.

An important limitation: bureau data has a lag. Court judgments and defaults may be months old by the time they appear on a report, and payment behaviour data reflects the past. The report tells you about history, not current financial position. Use it alongside — not instead of — trade reference calls and your own assessment.

Calculating a credit limit

There is no single formula that works for every business, but a practical starting framework is: set the initial credit limit at approximately twice the expected monthly invoice value. This ensures you are never significantly more exposed than one billing cycle. Then adjust up or down based on what your trade reference calls and bureau report revealed.

For example: if you expect to invoice $10,000 per month, start at a $20,000 limit. If the bureau report showed no adverse history and your reference calls were unambiguously positive, you might stretch to $25,000 or $30,000. If one reference was guarded or the bureau showed a default from two years ago, start at $15,000 or even $10,000 and review in 90 days.

Document your rationale. Write a short paragraph in the customer file: who was checked, what was found, what limit was set, and why. This record is useful in multiple ways: it protects you if the debt later goes bad and you need to demonstrate that you exercised reasonable care; it ensures consistency so that similar applicants receive similar treatment; and it provides a basis for reviewing the limit as the relationship matures.

Handling mixed evidence

Real-world credit decisions often involve mixed signals: one negative reference and two positive ones; a clean bureau report but a reference who was notably unenthusiastic; a small old default that has since been paid. How do you decide?

The conservative approach — which is almost always right for a new customer with no track record with you — is to start low and earn your way up. Set a lower limit than you might otherwise, apply it consistently, and review after 90 days of trading. If the customer pays reliably within terms over that period, increase the limit. If they do not, you have limited your exposure.

The alternative — starting high because the relationship looks promising — transfers the risk of a wrong decision to you rather than to the customer. When evidence is genuinely mixed, the customer should carry that uncertainty, not you.

Reviewing credit limits over time

A credit limit set at onboarding is not permanent. Review limits when: the customer asks for an increase (requiring a fresh check); the relationship has been trading for 12 months and payment behaviour justifies a higher limit; you observe warning signs that the customer's financial position may have deteriorated (see Lesson 3); or external events affect the customer's industry or business position.

Treat the credit limit as a live instrument, not a one-time administrative task. The information you gathered at onboarding has a shelf life.