Trade Finance: The Complete Guide for UK Importers and SMEs

Trade finance is short-term funding that pays your suppliers for goods before you have sold them, then gives you time to sell the stock and collect from customers before repaying. It suits UK importers, wholesalers, distributors, manufacturers and consumer brands that have to pay suppliers up front or on shipment but are paid by their own customers weeks or months later.

Key facts

• Funding level: up to 100% of supplier cost.
• Term: up to 180 days per transaction, usually within a revolving limit that refreshes as each transaction is repaid.
• Facility size: Growth Business Finance (GBF) arranges trade finance from £200k.
• Pricing: usually a margin over a reference rate for the days funds are outstanding, plus transaction fees, priced deal by deal. Bank Rate is currently 3.75% according to the Bank of England.
• Security: the goods and the trade transaction, typically with a debenture and sometimes director guarantees.
• Related facility: trade finance is related to, but separate from, asset based lending. Many businesses combine the two so that stock in transit, stock in the warehouse and the invoices that follow are all funded.
• Export support: UK exporters can also look at government-backed support from UK Export Finance.

How trade finance works

The core idea is that the lender funds the trade, not just the business. A typical import transaction runs like this:

1. You agree a purchase with a supplier, often overseas, who wants payment up front, on shipment or against documents.
2. You submit the purchase order and supplier details to the trade finance lender.
3. The lender pays the supplier directly, or issues a letter of credit guaranteeing payment.
4. The goods are shipped, arrive and are sold to your customers.
5. You repay the lender from sales proceeds within the agreed period, up to 180 days.
6. The limit becomes available again for the next order.

If you sell to business customers on credit terms, the trade finance can be repaid by an invoice finance or ABL facility when you invoice, creating a funded cycle from purchase order to customer payment.

Types of trade finance

• Import or supplier finance: the lender pays your supplier and gives you time to repay. The most common structure for UK importers.
• Purchase order finance: funding against a confirmed customer order, used to pay the supplier for goods needed to fulfil it.
• Letters of credit: a bank undertaking to pay the supplier when agreed shipping documents are presented. Useful with new or overseas suppliers. Usually charged as an issuance fee rather than interest.
• Supply chain finance: a buyer-led programme where the lender pays approved supplier invoices early and the buyer repays on the due date.
• Export finance: funding or guarantees against export orders or receivables from overseas buyers.
• Stock finance: funding against stock already held. For e-commerce businesses, revenue-based stock finance can provide up to 4x monthly revenue with no stock appraisal.

Incoterms and when the lender pays

Incoterms, the standard international trade rules published by the International Chamber of Commerce, set out when responsibility for goods passes from supplier to buyer. They matter for trade finance because they affect when the lender is asked to pay, who insures the goods in transit and what documents are produced. A lender will normally want to see that goods are insured and that title passes in a way that protects its security. Agreeing terms with suppliers that fit your facility, before you place orders, avoids delays at the point of payment.

Who trade finance suits

Trade finance is relevant wherever physical goods have to be paid for before they are sold:

• Wholesale and distribution: buying in volume ahead of customer orders. See wholesale distribution ABL.
• Retail and consumer brands: seasonal stock builds, often sourced overseas months before peak trading. See retail and consumer brands.
• E-commerce: fast-growing online sellers whose stock purchases outrun cash. See e-commerce.
• Food and drink: ingredients, packaging and imported products with tight supplier terms. See food and drink.
• Manufacturing: raw materials and components ahead of production. See manufacturing ABL.

It is rarely relevant to service businesses with no goods to fund, where a business loan or revolving facility is usually a better fit.

Costs and terms

Trade finance is priced deal by deal, usually from some combination of:

• Funding charge: a margin over a reference rate, charged only for the days each transaction is outstanding.
• Transaction fees: a fee per drawing or a percentage of the value financed.
• Letter of credit fees: issuance, amendment and confirmation fees.
• Facility fees: arrangement and, in some cases, annual renewal fees.
• Currency costs: if suppliers are paid in foreign currency, the exchange rate and any hedging.

Because you only pay while funds are drawn, the right comparison is the all-in cost per trading cycle. If stock turns quickly, the cost per cycle is lower. Set that cost against your gross margin on the order: trade finance makes sense when the margin comfortably absorbs the funding cost. Our financial calculator can help you model it.

Eligibility and what lenders look at

Trade finance lenders look at the transaction as closely as the business:

• The goods: what they are, how easily they could be sold, and whether they are perishable, seasonal or bespoke.
• Suppliers: their track record, location and reliability in delivering to specification.
• Customers: who buys the goods and their credit quality. Lenders often care as much about your buyers as about you.
• Margins: whether gross margin covers the funding cost and leaves a sensible profit.
• The cycle: lead times, shipping, stock turn and customer payment terms.
• Trading history and accounts: recent performance, management information and existing debt.

Documents you will need

• Last two years of filed accounts and current management accounts
• A cash flow forecast showing the timing of supplier payments and sales receipts
• Supplier details, sample purchase orders and pro-forma invoices
• Customer list, payment terms and any confirmed orders or contracts
• Stock reports and stock turn data
• Shipping and logistics details, including Incoterms
• A schedule of existing borrowing and security

Trade finance vs the alternatives

For more on how these fit together, see our invoice finance guide and working capital finance guide.

Common mistakes

• Ignoring margin. If the gross margin on an order is thin, the funding cost can eliminate the profit.
• Underestimating lead times. Shipping delays can push repayment beyond the facility term. Build in headroom.
• Overlooking currency risk. A weaker pound between order and payment raises your cost of goods.
• Funding slow-moving stock. Lenders, and your cash flow, prefer goods that sell through quickly.
• Treating trade finance in isolation. Without a facility to fund the invoices that follow, you may simply move the cash gap further down the cycle.
• Leaving it until the order arrives. Facilities take time to set up. Put one in place before the season or contract that needs it.

How a broker and debt adviser like GBF helps

Growth Business Finance is a commercial finance broker and debt adviser, not a lender. For trade finance, the value is in structuring the whole cycle:

1. Map your trade cycle. We look at suppliers, lead times, stock turn and customer terms to size the requirement.
2. Design the structure. We assess whether trade finance alone, or combined with invoice finance or ABL, gives you the most headroom.
3. Prepare the case. We present your goods, suppliers, customers and margins in the way trade lenders assess them.
4. Run a competitive process. We approach lenders whose appetite fits your goods and markets, and compare all-in cost per cycle.
5. Manage to completion. We coordinate due diligence, documentation and onboarding so the facility is ready for your next order.

If you already have trade or stock facilities, our facility health check can show whether they still fit your business.

FAQs

What is trade finance?

Trade finance is short-term funding that pays suppliers for goods before you sell them, giving you time to sell the stock and collect payment before repaying the lender.

How much of the supplier cost can be funded?

Up to 100% of supplier cost, for up to 180 days per transaction, depending on the goods, suppliers, customers and your trading record.

Is trade finance only for importers?

No. It is most common among importers, but it is also used by businesses buying from UK suppliers, by manufacturers buying materials and by exporters funding orders from overseas buyers.

What is a letter of credit?

A letter of credit is an undertaking by a bank to pay a supplier once agreed shipping documents are presented. It reassures suppliers without the buyer paying cash up front, and is usually charged as a fee rather than interest.

What is the difference between trade finance and stock finance?

Trade finance pays for goods you are buying. Stock finance lends against goods you already hold. Many businesses use both, often within a wider asset based lending structure.

Can trade finance be combined with invoice finance?

Yes. Trade finance pays the supplier, and when you invoice your customer, an invoice finance or ABL facility can repay the trade finance, funding the whole cycle from order to customer payment.

Find out what you could raise

If supplier payments are limiting how much stock you can buy, use check what you could raise for an indication of the facility your business could support, or call us on 020 3432 2341.

Growth Business Finance Ltd (company 17136039) is an Appointed Representative of Swoop Finance Limited (FRN 936513). Our FCA reference is 1034979. We are a commercial finance broker and debt adviser, not a lender. Finance is subject to status and lender approval.

Tom Renshaw

Founder and Managing Director, Growth Business Finance

Tom arranges business loans, asset based lending and property finance for UK SMEs and mid-market companies. More about GBF