Trade finance in the UK: letters of credit, supply chain finance and funding imports and exports

Trade finance is short-term funding tied to buying and selling goods across borders. It exists to cover the gap between the day you pay a supplier and the day your customer pays you, and in international trade that gap can run to 60 to 180 days or more. The main products are letters of credit, documentary collections, trade loans, supply chain finance, export invoice finance and bonds and guarantees. Which one suits you depends mostly on whether you are the one paying first or the one waiting to be paid, and how well you know the other party.

Key Takeaways

The cash gap, in numbers

Take an importer buying £80,000 of stock from an overseas supplier. The supplier wants payment at or before shipment. The goods spend weeks at sea, clear customs, sit in a warehouse and are then sold on 30 or 60 days' credit to UK customers. If that whole cycle takes 120 days, you have £80,000 out of your bank account for four months before a penny comes back.

Exporters have the mirror problem. They fund the production, ship the goods, and then often have to offer an overseas buyer 30 to 90 day payment terms to win the order. The risk is not only delay. When the buyer is in another country, chasing a late or disputed payment is harder than it would be with a UK customer.

A conventional business loan can fill the hole, but trade finance is built differently. The lender advances money against a specific order, contract or trade agreement and is repaid directly from the sale proceeds when the buyer pays. That structure is why some businesses that would struggle to borrow conventionally can still get trade finance, provided they hold confirmed orders.

If the underlying issue is a general squeeze rather than a specific trade, our guide on how to improve cash flow is the better starting point.

The main products at a glance

Product	What it does	Who it suits	Indicative cost
Letter of credit	Bank guarantees payment to the supplier once documents comply	New supplier relationships	A percentage of transaction value plus bank charges
Documentary collection	Banks pass documents against payment, without a guarantee	Established trading relationships	0.1–0.5% per transaction
Trade loan	Short-term working capital to pay the supplier or fund a contract	Importers, wholesalers	5–15% APR
Supply chain finance	Provider pays your supplier early; you repay later	Buyers wanting longer terms; suppliers to large buyers	1–3% of facility
Export invoice finance	Cash advanced against export invoices	Exporters on 30–90 day terms	2–5% of annual export turnover
Bonds and guarantees	Bank assurance that you will perform your contract	Contractors and exporters asked by the buyer	Varies by bank and security

Those cost ranges are indicative. Real pricing depends on your credit, the country, the buyer or supplier, and the bank. Always ask for the all-in cost in writing.

Letters of credit

A letter of credit (LC) is a legally binding guarantee from a bank that the seller will be paid, provided the goods or services are delivered on time and the required documents are presented in line with the terms. It is useful when the exporter and importer are in different countries and do not know each other, which is why many overseas suppliers insist on one rather than extend open credit.

The detail that catches people out is what the bank actually checks. It pays the exporter when conforming documents are presented. Those are the documents the LC calls for, which can include the bill of lading, the commercial invoice, an insurance policy or certificate, certificates of quality and a certificate of origin. The bank is not interested in whether the underlying sale was performed well, only that the paperwork shows on its face that it was. The rules most banks work to are the ICC's Uniform Customs and Practice for Documentary Credits (UCP 600).

Two practical consequences follow:

• As an exporter, a typing error or a missing certificate can stop payment, so the documents have to match the LC exactly. Agree the wording before the LC is issued, not after you have shipped.
• As an importer, an LC does not protect you from poor quality goods. If the documents comply, the bank pays. Quality protection comes from inspection certificates you specify as a required document, and from your contract.

Once issued, an LC is irrevocable and cannot be cancelled unless every party agrees. Payment under a documentary credit can take 5 to 10 business days after compliant documents are presented, so it is secure rather than instant. For the importer, an LC typically relies on the shipped goods and the documents rather than extra collateral, though the bank will assess your credit and may take security or require a deposit.

LCs have also become more relevant since Brexit. Within the EU's single civil justice area, UK and EU firms were more willing to trade on open account because recovering a debt looked easier. With trading partners outside that area, or with EU buyers under different rules, suppliers are more likely to ask for the certainty of an LC. Many businesses are both importers and exporters, since exporters need imported parts and materials, so this can apply to you on both sides of the same trade.

Documentary collections

A documentary collection sits between trading on open account and a full LC. The banks handle the shipping documents and release them to the buyer against payment, so the exporter keeps control of the goods until the buyer deals with the documents. There is no bank guarantee of payment, which is why it costs less: roughly 0.1–0.5% per transaction, well below LC fees.

It works best where you already trust the other side and mainly want an orderly, document-controlled process. If the buyer is new, or sits in a country where you cannot easily enforce a debt, the lack of a guarantee is a real weakness and an LC is the safer choice.

Trade loans

A trade loan is short-term working capital to pay for goods, usually secured against purchase orders or stock. For an importer it bridges the time between paying an overseas supplier and being paid by UK customers. For an exporter it funds production or purchase of goods while the overseas buyer is yet to pay.

Some banks structure them as revolving facilities for regular supplier payments or stock purchases, or as one-off funding for a specific contract. At the Royal Bank of Scotland, for example, a trade loan can fund a business to source, produce, package and ship goods, and is kept separate from your other borrowing. That separation matters when you already have an overdraft or term loan and do not want to disturb it.

LCs tend to suit first-time supplier relationships; trade loans tend to suit established ones, where the supplier is happy to be paid on or shortly after shipment and you just need the cash.

Worked example. You borrow £100,000 for 90 days to pay a supplier.

• At 5% APR: £100,000 × 5% × 90/365 = about £1,233 in interest.
• At 15% APR: £100,000 × 15% × 90/365 = about £3,699 in interest.

That is simple interest only. Arrangement and facility fees come on top, so the realistic figure is higher. If a £100,000 stock purchase earns you a clear margin well above that, the loan pays for itself. If your margin is thin, the finance cost can take most of the profit, and that is the point to question whether the order is worth doing on those terms.

Typical trade loan pricing can compare favourably with a business overdraft, which at the large banks runs at roughly 13.26–16.85% EAR. The overdraft is flexible but not tied to a transaction, which is why lenders price it higher.

Supply chain finance

Supply chain finance (SCF) is buyer-led. A large buyer extends payment terms with its suppliers; a finance provider pays the supplier early, at a small discount, and the buyer repays the provider at the extended date. The buyer improves working capital by paying later. The supplier gets cash faster than the invoice terms would otherwise give it.

It matters whichever side you are on:

• If you are the buyer, it lets you negotiate longer terms without squeezing your suppliers.
• If you are the smaller supplier to a larger buyer, ask whether the buyer runs an SCF programme through its bank. Getting paid early against a creditworthy buyer's name can be a cheaper source of short-term funding than borrowing on your own balance sheet.

Indicative cost is about 1–3% of the facility. Make sure you know how that is measured, because a discount for being paid 60 days early is a very different annualised rate from a discount for being paid 10 days early.

Export invoice finance

Export invoice finance advances money against invoices you have raised to overseas customers. It is the natural fit when buyers ask for 30 to 90 day terms and you cannot wait. Under export factoring you sell the invoice at a discount to a factoring company and receive up to 95% of its value, usually within 24 hours. The factor manages collections from the overseas debtor. With export invoice discounting, the arrangement is confidential and you keep collecting from your customers yourself.

Many facilities come with credit insurance against non-payment, which matters more for export than for domestic sales. Cost is typically 2–5% of annual export turnover.

Worked example. You raise a £100,000 invoice to an overseas customer on 60-day terms.

• Advance at 95%: £95,000 arrives within about a day.
• The remaining £5,000 is held back until your customer pays, less the funder's charges.
• If your annual export turnover through the facility is £600,000 and the all-in cost is 2–5%, that is £12,000–£30,000 a year, or about £2,000–£5,000 on every £100,000 funded.

That is a meaningful slice of margin. It is worth it where the alternative is turning down the order or waiting two months for cash you need to buy the next batch of stock. For the mechanics, costs and fit in detail, see our guide to invoice finance.

Trade finance and invoice finance also work together. Trade finance covers the pre-shipment stage (paying suppliers, funding production). Invoice finance covers the post-shipment stage (cash against invoices once goods are delivered). Some lenders offer both in a single facility from the outset, which avoids managing two lenders with overlapping security.

Bonds and guarantees

Overseas buyers often ask exporters and contractors for a bond or guarantee. It is the buyer's protection: the bank undertakes to pay if you fail to meet your side of the contract. Banks issue the main types:

• Advance payment bonds, which protect a buyer who pays a deposit up front.
• Performance bonds, which protect the buyer if you do not deliver as agreed.
• Warranty bonds, which cover the period after delivery.

Banks typically offer bonds and guarantees on standard terms, with fees and pricing depending on your credit and your relationship with the bank. Expect the bank to want security: bonds can be backed by your assets or by a cash deposit. That ties up either borrowing capacity or cash for as long as the bond runs, so factor it in before you agree to a bond in a contract.

Banks such as RBS can also issue standby letters of credit, or receive and validate guarantees issued by other banks in your favour.

Who provides trade finance

The UK market is served by clearing banks, specialist trade finance houses, export credit agencies and fintech lenders. Each has different appetites, pricing and minimum transaction sizes. Specialist houses range from private trade finance companies to Sharia-compliant lenders and funds, and some will look harder at the deal itself than at your balance sheet.

In practice:

• Your bank is the first call. It already knows your business and should outline what it can do.
• Alternative lenders are often more flexible on export factoring and purchase order finance. Some funding can be arranged in days, while secured products can take two to three weeks.
• Purchase order finance is worth knowing about. The lender pays your supplier directly for goods needed to fulfil a confirmed customer order, and is repaid from your customer's payment. It can be the difference between accepting and declining a £500,000 order from a major retailer that your own working capital cannot fund. Lenders look at the quality of the order, the buyer's credit and your ability to deliver.

Where UK Export Finance fits

UK Export Finance (UKEF) is the government's export credit agency, working alongside the Department for Business and Trade. It was established in 1919 as the world's first export credit agency. It does not usually replace your bank. It gives lenders the confidence to say yes where they otherwise might not, and it is aimed at exporters whose bank or other lender cannot provide the finance.

What it offers includes:

• A bond support scheme.
• The Export Working Capital Scheme, with facilities of up to £25 million, plus a General Export Facility.
• Export insurance, protecting against an overseas buyer not paying.
• Support in over 60 pre-approved local currencies.

In April 2023 the government increased UKEF's capacity by £10 billion, raising its maximum exposure limit from £50 billion to £60 billion. UKEF supports trade with EU and non-EU buyers alike. Eligibility rules, premiums and guarantee levels depend on the scheme and your business, so confirm them with UKEF or through your lender before you plan around them.

What it costs and what lenders look at

Trade finance can be expensive. The fees, interest and charges add up, and defaulting can damage your credit score. It is also document-heavy, so budget time as well as money, and consider using an external expert.

Lenders typically look for:

• An established business with assets and a trading history. New start-ups often struggle.
• A reasonable credit history.
• Evidence of the trade: export contracts or purchase orders, shipping agreements and invoices.
• Anti-money-laundering checks on the business, its directors and the overseas parties, including source of funds and beneficial ownership. These can lengthen the application, so start early and keep tidy records of every international transaction.

Foreign exchange risk usually remains with you unless you hedge it separately. A pricing win on a trade loan can be wiped out by a currency move if you are paying a supplier in dollars and selling in sterling.

How to choose

Work from the risk you are actually carrying:

1. You pay first and do not know the supplier. Ask for an LC arrangement, or fund the payment with a trade loan.
2. You pay first and know the supplier well. A trade loan or a documentary collection is usually enough.
3. You ship first and wait to be paid. Export invoice finance, ideally with credit insurance. Consider UKEF-backed support if your bank will not provide it.
4. The buyer demands a bond. Check how the bank will secure it and what it does to your borrowing headroom.
5. You sell to a large buyer with its own programme. Ask about its supply chain finance.

Then compare providers on products, fees, eligibility and conditions, and work out every cost in pounds before you decide. A rate quoted as an APR, a percentage of turnover and a percentage of the transaction cannot be compared until each is turned into a sum for a real trade.

Frequently Asked Questions

What is the difference between a letter of credit and a documentary collection?

A letter of credit is a bank guarantee of payment once compliant documents are presented. A documentary collection uses banks to pass documents against payment but gives no guarantee. The collection is cheaper, at around 0.1–0.5% per transaction, but leaves you exposed if the buyer does not pay.

Can a small or new business get trade finance?

It is harder. Trade finance is usually available to established businesses with assets and a trading history, and poor credit can block access. Because it is tied to confirmed orders, a business with a strong purchase order from a creditworthy buyer can sometimes access purchase order finance when conventional borrowing is out of reach.

Is trade finance only for international trade?

No. The products are designed mainly for cross-border trade, but banks also offer trade loans and related facilities for domestic trading.

How quickly can I get funded?

It varies. Some cash flow funding can be arranged in days, while secured products may take two to three weeks, and anti-money-laundering checks can add time.

What if my bank says no?

Try other providers, including specialist trade finance houses and export credit agencies. UK Export Finance exists partly for exporters whose bank or lender cannot provide the finance they need.

If you are weighing up a specific import or export order, Deplexifi can put the real figures side by side across lenders and tell you which structure costs least for that trade. You can see what we do at Deplexifi UK.

A letter of credit pays against compliant documents, not good goods, so an exporter's paperwork errors can block payment and an importer gets no quality protection from the LC itself.