What is a trade reference, and how does a new business get one?

Trade references is a type of business funding allows business-to-business lenders to complete a credit check on your business before deciding whether to extend you credit. They should come from someone you have done business with before and confirm that you pay your debts in full and on time.

If you are trying to open a trade account with a new supplier you may be asked to provide at least two-three trade references.

You may need to provide a contact name and phone number for each reference and they will then be asked questions such as, how long the account has been open, its credit limit and if there have ever been instances of late payment.

Trade references can provide an overview of the financial wellbeing of a company. However, as a new business, there is a slight catch 22 in that suppliers will expect trade references but you won’t yet have been in operation long enough to have secured any.

Still unsure what a trade reference is or how to get one? Worried you won’t  be able to get one as a new business without the proper references?

We’ve sourced advice from a trio of financial whizzes to answer the following question:

Question: How can I get trade references?

Small business owner Mark asked Startups for advice.

“I have recently opened for business and won a couple of contracts, but my suppliers are asking for trade references. If you’re only just starting up, how are you supposed to get them? And how creditable do they need to be?”

Expert answer:

Chartered accountant James Smith explains:

“It sounds like you need to explain to your suppliers that you are a new business and haven’t got any trade references (and then presumably pay cash on delivery for the goods). They may sometimes accept references from other sources (eg. your accountant) if you explain your situation to them.

“Have a chat to your contact on the phone – presumably they are aware you are a new business.”

Ian Johnston, an independent factoring broker for small businesses adds:

“Most people starting out probably won’t get credit so you need to talk to the supplier telling him that your business is new and discuss with them what you have to do to earn a credit account. In all probability they will tell you that if you pay cash for the first two or three months they will grant you a credit facility.

“Bear in mind that anyone who gives you credit is effectively helping to finance your business and companies need to know that if they are providing goods, services or money they will be repaid.”

Richard Osborne of Quick Formations Limited concurs:

“This is something all new businesses go through, and just about any supplier will be cautious to give credit to someone they haven’t heard of and hasn’t been around long.

“As everyone has said above, pay cash here and, after a while, you will have earned yourself a trade reference from this supplier!”

Top tips for getting a trade reference

The details necessary for a credit application may vary from business to business. However, the following information is fairly standard when assessing your creditworthiness:

• Details about your company type and structure
• How long you’ve been trading
• Revenue
• Credit amount and terms
• Bank details
• Contact details for your trade references

They say you shouldn’t trust a thin chef…

And you certainly shouldn’t trust a business with disorganised finances. The best way to present your business as a trustworthy borrower is to keep all your finances in order.

This can seem intimidating for someone with little accounting experience. That’s why you should invest in accounting software to do all the hard work for you – find out our views of the best accounting software for a small business.

And what about everything else?

From finance and mobiles to accountancy and CRM, find out our pick of the 10 best business tools that can make the day to day challenges of running a business that little bit easier.