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Reference Checks Can Be a Ticking Time Bomb
By Michael C. Dennis, MBA, CBF

Business Credit Concepts
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How should you respond to requests for credit references received from other trade creditors?

The answer is: Carefully, Factually, and Accurately.

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.

Unfortunately, providing an accurate and truthful credit reference is also not without risk to the information provider. If you provide a truthful but negative credit reference, the customer may retaliate by shifting their business to a new vendor. The customer might even sue the creditor providing the information for defamation - especially if the information provided was inaccurate, ambiguous, or subject to interpretation.

Since creditors are not obligated to provide information to parties requesting information, you may want to adopt a policy of declining to rate certain accounts. The rule here is similar to what you learned in kindergarten: If you don't have anything nice to say about someone, seriously consider the policy of not saying anything at all.

Credit managers should strongly discourage any "off the record" comments or recommendations by their employees. 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.

Credit references should be based on verifiable, factual, historical data. Everyone in the department should be taught that they are only authorized to disclose;

  1. The date the account was opened.
  2. The date of last sale.
  3. The customer's recent high credit.
  4. The customer's current account balance.
  5. How much, if any, is past-due, and how far past-due.
  6. The customer's normal manner of payment.
  7. Whether some form of security or collateral is held.

Credit references should normally only be given in writing (by mail or fax), and a copy of the response should be kept on file for future reference - just in case.

This may seem like a lot to remember, but the potential consequences of not rating properly make it worthwhile to take the time to get it right.

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