Credit References

Before considering an applicant for open account terms, creditors normally contact at least three trade references. To better control risk, creditors should require that at least one of those references be in the same industry as themselves. If an applicant does not list a creditor in your industry, ask for one. If you are unable to contact at least three trade references, or the references listed refuse to rate the applicant or will not provide you with enough information, contact the applicant and request additional trade references.   If you are not familiar with the trade references listed, you should independently verify the existence of one or more references by:

• Contacting information to verify the phone number,
• Looking up the creditor in a D&B ® reference book, or
• Verifying the reference's telephone number on the Internet (One of the many web sites that provide nationwide yellow pages services is www.bigyellow.com)

One way of detecting fraud is to examine an applicant's references. Ask yourself if it makes sense for the applicant to purchase the types and quantities of merchandise described by the credit reference. For example, you should be suspicious if a hardware store lists a book distributor as a major trade reference. 

Apply the following rules to reference checks:

• Use common sense in determining whether the references listed make sense given what you know about the applicant's business,
• Require references that are offering a credit limit at least as large as the one being requested,
• Be wary if all of the references listed are in the same area code or even in the same city or state,
• Be wary if you call a reference and reach an answering service, and
• Don't offer terms until you are comfortable about the applicant and the risk,
• Never rate an account in response to a credit reference check, even when asked to do so.  Ratings are the province of credit bureaus, not individual creditors.

Creditors are not required to provide information to any third party about their credit experience with any past or present customer. Many credit managers do so because they believe that an open exchange of credit information benefits everyone. Other creditors provide credit references only to members of their industry credit group(s). Some creditors rate only by mail or fax. Other companies have a policy of not to respond to any credit reference requests. These companies may or may not contribute information to credit reporting agencies such as Dun and Bradstreet ®.

Creditors that provide credit references should be aware of the risks of doing so, and should proceed with caution. Creditors that provide inaccurate information about a customer can be sued for damages by their customer, or by the creditor submitting the request for misrepresenting the facts. A misrepresentation includes falsifying a credit reference, as well as concealing factual information about the customer. Credit managers should be aware that they are at risk -- even if erroneous information was presented accidentally.

Even providing accurate response to requests for credit references is not without risk. If the creditor provides a negative -- but accurate -- credit reference and their customer finds out about it, the customer may choose to take its business elsewhere. (In theory, the customer will never learn which creditors were contacted and what they reported. In practice, customers are often told what their creditors reported). Some creditors will not provide a "negative" credit references on a customer - they will simply refuse to rate the account.  To reduce the potential for problems, the credit department should follow these guidelines:

• Provide only factual, historical information,
• Don't make offhand comments about a customer. (Forget about any assurance that comments made will be "off the record"),
• Be careful about what is said to competitors about customers,
• Creditors do not want to be accused of violation of federal or state antitrust laws,
• Make certain that anyone providing credit references is aware of these rules,
• Try to respond by mail, fax, or email only. There are two advantages of doing so: [1] You have an idea about who is asking for the reference and [2] You have a written record of your response.

Limit responses to credit inquiries to:

1. Date the account was opened,
2. High credit (recent or historical),
3. Balance owed at the present time,
4. Amount past due at this time,
5. How far past due,
6. Is the account secured, and if so how?
7. The customer's normal manner of payment.

Creditors that provide an inaccurate, positive recommendation about a customer by misrepresenting the facts and concealing factual adverse information about that customer, might be sued for their deliberate attempt to misrepresent the facts about that creditor's creditworthiness. That credit information provider may lose the case and may then be held responsible for damages suffered by other creditors that relied on the creditor's misrepresentations and granted credit terms to the applicant.

One final comment:  Discourage any "off the record" comments or recommendations in response to a reference request. Even "off the record" statements may still subject the reference provider to some legal liability. Credit managers themselves must be very careful about what they say about customers - especially during roundtable forums at industry group meetings. Occasionally, an "off the record" comment at a trade group meeting gets repeated word for word to the customer involved.

© 2011.  Michael C. Dennis.  All Rights Reserved.  Michael is the author of "Credit and Collection Handbook."   Michael can be reached by email with questions or comments at mcdennis13@yahoo.com