Let’s face it – bankers are not the most popular people these days. Some of the criticism is well-deserved, while other brickbats tarnish with a broad brush tens of thousands of people who had nothing to do with toppling the economy.

As I look at my industry, I see a lot of good – from financing thousands of Main Street businesses to possessing the know-how that many industries have benefited from. One of many things commercial banking is good at is risk management. An aspect of this expertise is reference checks that are essential to establishing relationships with your prospects as well as selling to them on credit.

Among credit and risk management methodologies, we have a concept called the “Five C’s of Credit.” It helps determine the credit-worthiness of a prospective client or business partner. One of the five is “character.” Especially when extending credit to privately held companies, the reputation of owners and management teams can help ensure that you will get paid for products and services delivered.

That’s why references are so important.
Excuses, Excuses

Some common misconceptions, excuses and reasons for not obtaining references are that they:

Do not add value

Are not worth the time invested

Take too long to obtain

Take too much of our time

Are not truly objective and independent

The truth is that one reference takes approximately 10 to 15 minutes to obtain. Is 30 to 40 minutes spent on getting three references too much to avoid a collection effort or a loss? A week has not gone by in my banking career that I have not heard this or similar phrase: “This is a great customer of the bank.” Or, “They have been with us for a long time,” or, “This is a strong borrower.” The length of relationship, however, does not automatically guarantee creditworthiness of a client. And being familiar with or aware of a business is not the same as knowing and understanding the business, its management, and its strengths and weaknesses.

As for worrying that the principals may be offended if they are asked for references, remember: Most of your clients likely obtain references and credit checks on their prospects. It is all about how effective you are at delivering the inquiry.
Best Practices

Here are some best practices that were shared by several commercial lenders:

Have a detailed, written credit policy. If you merely recommend your staff obtain references, chances are it will not happen. The ultimate goal is to make reference checks a part of your sales culture; a written policy is a good start.

Get two or three references per client. It is common for a prospective client to offer references from its accountant, attorney, financial advisor, or even existing lender. However, it is also important to seek individuals and businesses that are not on the prospect’s payroll – such as customers, vendors, business partners, accountants and attorneys who do not work for that company.

Get it in writing. Almost nobody has photographic memory to remember the fine details. Reference providers may feel additional pressure to be honest and forthcoming with information if they know that you are keeping records.

Devise a list of specific questions. You should consider developing a reference questionnaire with specific questions that an employee of your company will be able to follow routinely.

Verify unfamiliar reference sources. If you are not familiar with a reference provider, find someone trustworthy who does. If it is a company outside of your market, at the very least look up its general number and try to get to the reference provider by a longer route. This and other similar safeguards can help eliminate an imposter posing as a reference provider.

Shy away from assumptions; be factual. A good example is a conversation with a loan officer who received a referral from the bank’s outside counsel. When I inquired about specific references, the banker’s response was: “This was a referral from the bank’s counsel. Do you think he would have made a referral if he did not think highly of the prospect?” Yes, this is one possibility. We could make lots of other suppositions, but the bottom line is that the banker did not know because he did not ask.

An obvious but often missed conclusion from this last bullet point is a referral is not the same as a reference.n

(Dima) Neil Berdiev is manager of the credit analysis group, commercial lending, at Boston Private Bank & Trust Co. Email:   dberdiev@BostonPrivateBank.com