Bank reference – definition and meaning

A Bank Reference or Banker’s Reference is a statement from a bank regarding one of its customers. The bank informs whether the customer can meet a specific financial commitment. Many people who work in financial institutions call it a Status Inquiry.

Do not confuse the term with the bank reference rate. The bank reference rate is an interest rate upon which we base an interest rate swap or floating-rate security.

Before approaching the bank for a reference on somebody, you will need to get their permission.

A supplier, for example, who wants to offer credit terms to a new customer will usually seek a bank reference.

Bank references are not specific

Bank reference
You need to interpret the reference according to how much praise the bank has included or omitted. This is because banks will not go into specific details. Put simply; most bank references are vague.

The bank will charge a fee for sending the reference. The inquirer usually pays the fee.

The bank will warn the inquirer not to rely solely on the reference when making a decision. The institution will use standard phrases such as ‘respectable and good for your figures,’ ‘capital/resources fully employed,’ or ‘customer not known to us for long.’

Any reply that does not include a phrase such as ‘good for your figures’ is usually taken as a warning. A stronger warning sign is if the word ‘respectable’ does not appear in the letter.

Bank references never contain specific information or advice. Banks will never write, for example, ‘don’t trust this guy’ or ‘he is unreliable.’

Don’t rely on a bank reference

If you are deciding whether to offer a new customer credit, you should widen your search. Do not rely just on the bank reference.

You could also contact other suppliers or a credit rating agency. Credit agencies have information on the person’s credit history. Their credit history helps determine how good they are at paying back debts. Not only will it help you decide whether to offer credit, but also how much.

Additionally, you could get in touch with their accountants. To do this, you should get the customer’s permission first.

What do you do if you are a landlord and the prospective tenant’s bank reference is not reassuring? One option would be to request a larger deposit.

In many advanced economies, inquirers will instruct their own bank to ask the third party’s bank for a reference.

According to Collins Dictionary, a banker’s reference is:

“A confidential statement about the financial status of a customer, provided by one bank to another, or to an authorized enquirer.”

Such references play a critical role in facilitating trust between parties in financial transactions.

When might a bank reference be required?

Here are ten situations in which a bank may be asked for a reference concerning a customer:

  • Mortgage Application

The lender needs to assess the applicant’s financial reliability.

  • Business Loan Approval

A bank may require a reference to determine the creditworthiness of a business seeking a loan.

  • Leasing a Vehicle

Dealerships need to determine whether the lessee can handle the lease payments.

  • Rental Agreements

Landlords may request a reference from potential tenants to verify their ability to pay rent.

  • Credit Card Applications

Credit card issuers need to evaluate the risk of extending credit.

  • Supplier Credit Terms

If a supplier wishes to offer payment terms to a new customer, they need to find out whether they are good for it. If somebody is “good for it,” it means that they are creditworthy regarding a specific debt arrangement.

  • Overseas Transactions

For international trade, a bank reference might be needed to establish trust in cross-border dealings.

  • Business Partnerships

Companies may enquire about the other party’s financial health or stability before entering into a new partnership.

  • High-Value Purchases

Sellers of luxury goods may require a bank reference to confirm the buyer’s payment capability.

  • Investment Opportunities

Investment firms might ask for a reference before allowing significant investment activities.

Video – What is a Bank Reference?

This video presentation, from our sister channel on YouTube – Marketing Business Network, explains what a ‘Bank Reference’ is using simple and easy-to-understand language and examples.