They're Good For It

The prospect looked great on paper. They told the creditor that they had been in business 10 years, their sales were $50 million, and they provided those commonly-requested three trade references. The creditor's research showed high credits from $20-$100,000, net terms, all prompt payments. Unfortunately, for the creditor, they suffered a $30,000 loss on a first sale to this customer by following a very common, yet outdated business practice of checking trade references to make credit decisions. The company turned out to be as bogus as their references.

In this day and age, it's still common practice for companies to check trade references to help make credit decisions. This is an ancient practice urgently needing updating. Nothing is more naive than granting credit based solely on heresay. Can you imagine a bank providing loans based only on your references? This sounds ridiculous, but commercial creditors everywhere rely on heresay to make their own credit decisions everyday.

While it isn't always a worthless process to check references, it needs to be done smartly:

1) Skip checking trade references unless you know the creditors to be reliable. If you've never heard of the company or can't verify their integrity, don't bother.
2) ALWAYS, ALWAYS, ALWAYS check bank references unless you can verify cash balances and credit line information through a public source.
3) If you do check reliable trade references, take their information in the context of their risk versus yours. If the reference comes from a big company and you're small, don't kid yourself that you'll be paid the same way. Larger companies generally have more power than small companies to get paid within terms.
4) NEVER simply rely on trade references to determine credit worthiness. Pull a D&B or Experian to see how your prospect pays ALL their creditors, not just the top three they handpick for you to call.

Companies that rely solely on trade references are only analyzing a small piece of a large puzzle. When companies default on payments based on an incomplete process, you'll then have a chance to realize which pieces you should've taken the time to put together.