Bank reference

From CEOpedia | Management online


Bank reference is an information given by the bank to its customer (other banks, lending institutions). It regards the possibility of reaching some financial commitment from the customer of the bank. It is also called banker's reference or status inquiry (Inc The Leasing Expert 2010, p.37). It consists of (Inc The Leasing Expert 2010, p.37) :

  • The duration of customer's relationship with the bank
  • type and quality of collateral provided
  • the number of customer's balances and loans are taken
  • replica of the customer's statement of financial affairs on file with the bank.

A bank can realize such information after getting the written permission of its customers. Realizing reference requires a fee for providing the enterprises with that information. To receive bank reference requires should (Inc The Leasing Expert 2010, p.37):

  1. Fill a request and consent form
  2. Send the form to the customer and ask for filling the consent section and sending it back
  3. Use the attached letter to deliver the form to the customer's bank.

Key points of a bank reference

There are a few things you have examine in a bank reference (Inc The Leasing Expert 2010, p.38) :

  • Date Opened

That is very substantial. The company has to be operating for longer than 2 years. Sometimes companies claim that they have been in business for a few years but their statement shows something different. In that case, it is probable that they have another account in another bank or that they have switched banks in the last two years. It is needed to get the statement older than two years for the company that we are interested in.

  • Name exactly as it appears on account

It's another very important thing to check. The name of the company on the financial statement has to match the name on the customer's business check that the company is receiving during processing the lease document.

  • Non-Sufficient Fund(NFS)/Over Draft (OD)

The value of this indicator can change from zero to eighty or more. When it states more than five, approving the deal is starting to be more difficult. However, some cases have quite a reasonable explanation.

  • Trade references

If the request does not go beyond $ 25k, the trade references are not needed. It does not mean you should not examine the credit criteria of every single funding source.

Trade reference also indicates whether the creditor pays his payables on time. It is one of the most important things we can receive from this point of bank reference. From the trade reference form you can also get information on other subjects such as current balance, payment history, high credit, date opened and terms. The current balance shows if the applicant is carrying the balance. If the applicant is failing in paying interest, his current balance is higher than his high credit. Pay history is the summary of the most important information that we want to get from this point of the bank reference: whether the applicant pays within 30 days. High credit is the largest amount of money owed by the applicant, which has been approved due to the reference (Inc The Leasing Expert 2010, p.38).

Examples of Bank reference

  • Bank statement: A bank statement is a document that summarizes all the financial activity in an account. It typically includes deposits, withdrawals, fees, interest earned, and the current balance.
  • Credit report: A credit report is a document that includes information about a person’s credit history. It includes information about credit accounts, payment history, public records, and inquiries into the credit.
  • Credit score: A credit score is a numerical representation of a person’s creditworthiness. It is calculated based on a person’s credit history and is used by lenders and banks to determine whether to approve a loan or other credit request.
  • Letter of reference: A letter of reference is a letter written by a bank or financial institution on behalf of an individual or organization. It is usually written to provide an opinion of the individual or organization's creditworthiness, financial strength, and other qualities.

Advantages of Bank reference

The use of a bank reference is a common practice in financial management and it can offer several advantages. Here is a list of the main advantages associated with using a bank reference:

  • Increased security - Bank references provide a layer of protection by verifying the identity of potential customers and ensuring that they can be trusted to pay their debts.
  • Access to credit - By providing a bank reference, potential customers can prove their creditworthiness and may be able to access better terms and more favorable loan rates.
  • Easier record-keeping - Bank references can help businesses keep track of customers’ financial histories, enabling them to make informed decisions about future transactions.
  • Improved customer relations - By providing a bank reference, businesses can build trust and create a more positive relationship with their customers.
  • Reduced risk of fraud - Bank references can help to reduce the risk of fraud, as businesses can be sure that customers can be trusted to pay their debts.

Limitations of Bank reference

Bank references are a type of financial reference that provide insight into an individual or organization's financial standing. However, there are several limitations to consider when using bank references. These include:

  • Time constraints: Often it can take a long time to process a bank reference as they need to be verified by the bank and sent back. This can slow down the overall process and make it difficult to get the information quickly.
  • Accuracy: Bank references are not always 100% accurate as they rely on the accuracy of the individual or organization providing the information. For example, the information provided may not be up-to-date or may not accurately reflect the current financial standing.
  • Limited information: Bank references only provide a limited amount of information about an individual or organization. This can be especially problematic for larger organizations that may have complex financial arrangements, as the reference may not provide enough information to make a comprehensive assessment.
  • Cost: Bank references may be costly to obtain, as banks may charge a fee for providing the reference. This can be a barrier for those who are unable to afford the cost.
  • Privacy: Bank references can be a violation of an individual or organization's privacy, as sensitive financial information is being shared. This means that individuals or organizations may be reluctant to provide a bank reference, as they may be concerned about their information being used without their permission.

Other approaches related to Bank reference

Financial management involves the use of a variety of approaches to ensure the effective management of a company's finances. These include the use of bank references, which refer to the information found in a borrower's bank statement. However, there are other approaches that can be employed, such as:

  • Cash flow analysis - this involves monitoring the inflows and outflows of a company's cash, and identifying areas where cash can be saved or reinvested.
  • Financial planning - this involves setting financial goals, and creating plans to achieve them, such as budgeting and forecasting.
  • Risk management - this involves assessing the risks associated with different investments and managing them accordingly.
  • Performance measurement - this involves monitoring the performance of a company's investments, and making changes where necessary.

In summary, there are various approaches that can be used in financial management, including bank references, cash flow analysis, financial planning, risk management and performance measurement. Each of these approaches can help to ensure the effective management of a company's finances.


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Author: Witold Urjasz