Guide to trade finance for UK businesses

Learn more about trade finance solutions, how partners can reduce the risks to your imports and exports and make sure you get what you pay for.

What is trade finance?

The term ‘trade finance’ covers a lot of territory. It can include things like finding ways to access cash while you’re waiting for payments for your first international exports, protecting your transactions with bond and export insurance and providing better protection for both importers and exporters through letters of credit.

Simply put, trade finance ensures that exporters are paid for meeting the terms they agree with buyers, and that importers receive the goods they paid for on the terms they agree with suppliers.

Trade finance solutions can be provided by a range of organisations, from banks and buyers to government agencies and specialised financial service providers and of course a number of alternative lenders, some of whom can be accessed via our platform.

How do I find the right trade finance option for me?

You’ll have different needs according to where you sit in the trading supply chain. For example, you say you work with overseas suppliers, which means you import goods into your local market from elsewhere. That means your main concerns include finding the easiest and least costly ways to handle payments to your overseas suppliers and ensuring that you get what you pay for in the timeframe you expect.

What other trade finance options should I be looking into?

As someone who’s importing goods from overseas, you want to make sure you can negotiate the best prices and, if possible, spread your payments out over a convenient time period. Specialist finance providers can help with this.  A provider can find you funding to cover the upfront expense of imported goods until you can deliver them to local customers and recoup your purchasing costs.

Why would you use trade finance?

There are always risks with transactions across international borders and between businesses. For example, whether the exporter will be paid in full or on time, or if the importer gets the goods they were expecting. If, for example, a company has a bad credit rating or history of non-payment, the risk increases.

There is also a risk associated with exchange rates fluctuations and political instability. For example, a company may not like exporting goods to certain countries because of the political situation, a struggling economy or a lack of legal structures.  Trade finance, provided by banks, trade finance companies and other organisations, is aimed at reducing risks. It creates stability, and ensures exporters and importers get what they expect to receive. It might also be used to access cash while awaiting payment for goods that your business has exported.

Trade finance is widely used. The World Trade Organisation estimates that 80 to 90 per cent of global trade relies on it.

How does trade finance work?

There are different types of trade finance.  The type that applies to you will depend on the type of business and the markets that you operate in.  Some of the different types of trade finance would be:

Letters of credit 

Letters of credit are issued by a buyers bank and provide the seller with a guarantee that their payment will be received on time and for the correct amount, according to a set of conditions.  If for any reason the payment from the buyer is not completed, the issuing bank would be required to step in and cover the cost of the payment to the seller.

Export finance

Export finance can also smooth cash flow as your business waits for payment from overseas buyers, which can often take 90 days or more.This can provide you with direct loans, working capital or letters of credit to ensure a healthy flow of cash to your business until your overseas buyers pay for orders, which can take 90 days or more.

Exporters can also get financial support through a service called factoring. This involves working with an invoice finance facility that provides upfront payments to exporting businesses waiting to receive payment from overseas customers. Once an invoice is submitted to a customer, the finance provider will advance a portion of the total sale price directly to the exporter in as little as 24 hours. The provider then handles collection of the full balance from the overseas customer, and pays the remaining portion – minus a fee – to the exporting firm once final payment is made.

Trade credit 

Conversely, trade credit enables an importer to buy goods on account, meaning they can pay the exporter at a later date. When goods are delivered, trade credit is offered for a certain period, such as 30 or 60 days, although it can be longer.

There are short-term trade finance solutions (usually with terms of less than year) and medium-to-long term products, with terms of five to 20 years.

Political risk insurance

Political risk finance protects organisations at risk of losing revenue due to political events. It can cover expropriation (when property is confiscated by government), political violence, terrorism, outbreak of war or sovereign debt default.  This sort of insurance could prove beneficial due to the uncertainty around Brexit and exactly what sort of implications this could have on trade.

supply chain finance

Supply chain finance is a set of technology-based business and financing processes that link the various parties in a transaction, such as the buyer, seller and financing institution. This lowers financing costs and can also provide short-term working capital for exporters and importers.

How does a letter of credit work?

One way to reduce risks and make sure both importers and exporters stay happy is by obtaining a letter of credit, usually from a bank. For importers, a letter of credit clearly spells out what products they are paying for and how much they are paying. The letter will also specify the shipment and delivery terms that must be fulfilled by the supplier.

Letters of credit provide different reassurances for exporters, specifying the supplier’s terms of payment and guaranteeing that payment will be fulfilled upon delivery.

What are the costs of trade finance?

Taking out trade finance will obviously make the trading transactions less profitable, as interest must be paid on the loan provided by your trade finance partners.

Interest rates are generally between 1.25 per cent and three per cent per annum, with lower rates for larger orders. The cost of finance also depends on the exporter and importer, as their credit histories, location, and other factors affect the level of risk involved.

Another factor around cost is credit protection, which means the lender will be liable for a loss if the customer fails to pay. This extra risk increases the cost, which might be in the form of additional fees, although this could be worth paying.

How long does it take to secure trade finance?

Trade finance companies are sometimes less concerned by the balance sheet of businesses as mainstream lenders, as the main facts they need to know are details of the transaction, including what it’s for, how much it will bring to your business and what other businesses are involved.

With less detail required, trade finance can be quicker to arrange than other alternative business finance options. It may take a week or so, as long as the lender has all the relevant details.

However, many banks and trade finance companies will require details of business operations and finances – including financial statements, business plans, financial forecasts and details of directors – which will add time to the application.  When seeking trade finance, UK companies have several options available. In general, trade finance solutions from specialist companies can be confirmed more quickly than commercial banks.

What type of security do I need for trade finance?

In some cases, purchase orders can be used as security, as this is what the finance is being used to cover. As with other finance options, security can also be in the form of fixed assets, while investments can sometimes be accepted.