Trade references: what do they mean for my business?

If you’re just starting a business, you might have run across paperwork that requires trade references. What are they, how are they used and how can you acquire them? Read on to find out.

What is a trade reference?

Trade references are an essential background check for business-to-business suppliers and lenders. Similar to employment references, your trade references will vouch for how long you have been working together and any issues with payment.

Trade references usually supplement a credit check, and help to build a bigger picture of a business’s financial health.

Customers with longstanding payment histories are safe bets for creditors, so they often reserve their best deals for companies with excellent trade references and credit profiles.

Why use trade references, and not just a credit check?

Creditors need the most up-to-date picture of a business they can get. Banks often don’t report negative payment histories to credit bureaus until they are at least 30 or 60 days late, so relying on credit checks alone can mean missing vital information.

By speaking to trade references, creditors can spot warning signs much more quickly. A reference can tell them that you’re two weeks late on your last payment, or that you have a history of being flaky.

How do trade references work?

A typical business credit application will ask for the names and contact details of three trade references. Like with job references, you should ask your trade references before you list them. Business Debtline has a helpful letter template for requesting a trade reference.

Lenders and suppliers will usually contact references by phone or in writing to ask how long an account has been open, the credit or purchasing limit, and how many times the account has been paid late.

The difference between primary and secondary references

Primary references, like product and equipment suppliers, are the most valuable. They are the most essential trade partners for the business and thus a priority for payment. Primary references might include advertising, logistics and wholesalers.

Secondary references, such as subcontractors, are less reliable indicators of a business’s financial health. They might include consultants, accountants and decorators – all less central to the day-to-day running of the business.

Other factors creditors might consider

Some small, but eloquent details creditors might look for include:

  • Whether your references are local to you – since they’re more likely to be paid quickly.
  • Potential bias, for example working with a relative’s business.
  • The references that you gave to your current references when you opened an account.
  • How often your reference sends you payment prompts.
  • Any special discounts you receive from your trade references, especially if you still make late payments.
  • A pattern of nearly paying late, rather than as soon as possible.
  • How recent your last dealings with references were.
  • Any references who sell the same product – why would you be looking to change supplier?

What doesn’t count for a trade reference?

Creditors usually won’t accept utilities providers or landlords as a reference, because they are top priority for payment. Businesses can let suppliers slide for a while, but are unlikely to risk going without power or premises.

If you’ve only worked with a supplier as a one-off – for example, a graphic designer for your branding – that might not stand up to scrutiny, as it says very little about how you work in the long term.

My business is new, and I have no references. What do I do?

If your business is brand new, you may feel as though you’re at a dead end – you have no references, but don’t know how to go about getting them.

Let potential suppliers know that your business is new and discuss your options. Many will be happy to give you a chance if you can offer them some safety, for example paying cash upfront or on delivery for the first few months of trading.

Make a point of paying bills promptly and you’ll soon have earned your first reference.

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