Trade finance for UK importers and exporters

These are older, bank-based instruments that manage the risk between buyer and seller rather than lending money outright. They are still widely used with new suppliers, distant markets and high-value shipments.

Letters of credit

Your bank, as issuing bank, undertakes to pay the supplier once it presents documents that match the credit exactly: typically a commercial invoice, bill of lading, packing list, certificate of origin and any inspection certificate. The supplier gets certainty of payment; you get certainty that nothing is paid until the goods have demonstrably shipped on your terms. Most letters of credit are issued under the International Chamber of Commerce's UCP 600 rules. Discrepancies are common: a date or description that does not match can delay payment, so the credit should be drafted with care. Issuing a letter of credit uses a bank facility, and a trade finance lender can fund the payment when it falls due.

Documentary collections

The supplier's bank sends the shipping documents to your bank, which releases them only when you pay (documents against payment) or accept a bill of exchange to pay on a future date (documents against acceptance). There is no bank guarantee of payment, so it is cheaper and simpler than a letter of credit, and it suits established relationships where some trust already exists.

The Incoterms agreed with your supplier decide when risk passes to you, who pays freight and insurance, and who handles customs. The International Chamber of Commerce's Incoterms rules define each term. Buying on terms such as FOB means you take on the goods, and the cost of carriage, at the port of shipment, so your lender's exposure starts earlier and it will want cargo insurance in place. Buying delivered terms shifts that to the supplier but usually raises the price. Lenders read the Incoterms on each invoice to see what they are actually financing and when.

A trade facility usually funds the supplier invoice. The costs between the port and your warehouse, such as freight, insurance, customs duty, import VAT and agent fees, often need another source. VAT-registered importers can reduce the cash tied up in import VAT by using postponed VAT accounting, which lets it be declared and recovered on the same VAT return; HMRC explains when you can account for import VAT on your VAT return. A revolving credit facility often sits alongside the trade line for the rest.

Illustration: one shipment through a trade facility

Illustration only, with round hypothetical numbers; not a quote or offer. A homewares importer orders £100,000 of goods from a supplier in Asia, with a UK retailer's order for the full consignment worth £150,000 on 60-day terms. The trade lender pays the supplier's deposit and balance. The goods land about six weeks later; the importer pays freight and duty from its revolving facility and uses postponed VAT accounting for the import VAT. On delivery it invoices the retailer, draws against the invoice through its invoice finance line, and that advance repays the trade drawing. When the retailer pays, the invoice line is cleared and the margin, less both lenders' charges, stays in the business.

Exporters face the opposite gap: producing and shipping before an overseas buyer pays. Export invoice finance and credit insurance on overseas buyers are the usual tools. UK Export Finance, the government's export credit agency, can support banks lending to exporters: its Export Working Capital Scheme provides a partial guarantee to lenders funding export contracts. Eligibility and availability are set by UK Export Finance and the lender.

Trade finance usually suits UK importers, distributors and wholesalers with at least a year or two of trading accounts, a healthy margin on each deal and, ideally, confirmed customer orders behind the goods they buy; newer traders can be considered on smaller limits. Once the facility is in place, lenders still assess each deal on the following points.

• Margin on each deal: thin margins leave no cushion for delays, currency movements or claims.
• Pre-sold or speculative: goods bought against a firm customer order are far easier to fund than stock bought to sell later.
• Supplier track record: history of delivering to specification and on time, and whether you have traded with them before.
• End customers: their credit quality and concentration.
• Goods and routes: commodities with a ready market are preferred; perishable, highly specialised or regulated goods and sanctioned or high-risk countries are restricted.
• Your experience in the product and the market, and your own trading history, accounts and credit profile.
• Currency risk: how you protect margin if you buy in dollars or euros and sell in sterling.

A trade lender's main security is control of the goods and of the sale that repays it: it pays the supplier directly, may hold or be named on the bill of lading, and takes an assignment of the resulting customer invoice.

Most lenders also take a debenture over the importing company and ask directors for personal guarantees. They usually require marine cargo insurance with the lender noted as loss payee, and may require credit insurance on your main customers. Where a bank or invoice finance provider already holds a debenture, the lenders agree in writing who has first claim on the goods and the debts before the trade line goes live. Our guide to debentures and fixed and floating charges explains how that priority works.

Setting up a new trade finance facility typically takes around three to six weeks, covering credit approval, checks on you, your suppliers and your trade routes, and the legal documents.

It can take longer where a lender has to approve several overseas suppliers, where goods or countries need extra sanctions screening, or where an existing bank or invoice financier has to agree priority over the goods and debts. Once the limit is live, individual drawings against approved suppliers are usually processed within days of the pro forma invoice being submitted. A letter of credit depends on the issuing bank's own timetable and on the supplier presenting compliant documents, so build in time for amendments.

• Delays cost money. A shipment held at port or rejected on quality extends the drawing and its charges.
• Currency exposure can erase the margin that was supposed to repay the facility.
• Guarantees and control. Directors are usually asked for a guarantee, and lenders may require their approval of new suppliers.

If a transactional trade line is not the right fit, other funding can cover part or all of the gap between paying a supplier and being paid by your customer.

Negotiated supplier credit, smaller and more frequent orders, or customer deposits can reduce what you need to fund.

• Purchase order finance for a single confirmed order you cannot fund yourself.
• Stock finance once goods have landed and are held before sale.
• Invoice factoring to release cash as soon as you invoice, if paying suppliers is less of a problem than waiting for customers.
• A revolving credit facility for a flexible line not tied to individual shipments.