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

When looking to open an account with a new supplier you may be asked to provide trade references. Expert advisers explain how the process works...

Trade references are a way for business-to-business suppliers to complete a credit check.

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 (who will be happy to confirm you pay regularly and on time etc.).

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.

But how do you get your first one if a supplier won’t work with you without one?

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 but if your only 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 havent heard of and hasn’t been around long.

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