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Trade finance
Finance and risk protection for UK businesses buying from or selling to overseas partners. Letters of credit, bonds and guarantees, export credit insurance, and working capital. UKEF-backed options available.
- For UK importers and exporters trading internationally
- Letters of credit, bonds, export insurance, and pre and post-shipment finance
- Access to UKEF (UK Export Finance) government-backed schemes
- Independent commercial finance broker
Last updated: June 2026
What is trade finance?
Trade finance is the umbrella term for the financial instruments and products that make international trade work. It addresses a fundamental tension in cross-border commerce: exporters want to be paid as soon as possible to protect against non-payment, while importers want to defer payment until they have received the goods. Trade finance bridges that gap.
The most common trade finance instrument is a letter of credit (LC), a bank guarantee that the exporter will be paid once they meet the agreed delivery terms. Other core products include bonds and guarantees (covering performance and warranty obligations), export credit insurance (protecting against buyer default), and pre-shipment or post-shipment working capital (cash to produce and ship goods before payment arrives).
Trade finance is also referred to as export finance when the focus is on UK businesses selling overseas, or import finance when the focus is on UK businesses buying overseas. The mechanics are similar, the perspective differs. Globally, trade finance is governed by rules and standards set by the International Chamber of Commerce (ICC), including UCP 600 for letters of credit and URDG 758 for demand guarantees.
How trade finance works
Trade finance instruments share a core pattern: documents and bank guarantees stand in for trust between parties who may have never met. This is how a typical letter of credit transaction flows.
- 01
Buyer and seller agree terms
The importer (buyer) and exporter (seller) agree the goods, price, delivery terms (Incoterms) and payment method. Both agree to use a letter of credit.
- 02
Importer's bank issues the letter of credit
The importer arranges for their bank (the issuing bank) to issue a letter of credit in favour of the exporter, guaranteeing payment on presentation of agreed documents, typically shipping documents, bills of lading and certificates of origin.
- 03
Exporter ships and presents documents
The exporter ships the goods according to the agreed terms, then presents the required documents to their own bank (the advising or nominated bank).
- 04
Documents are verified, exporter is paid
The banks verify the documents conform to the letter of credit terms. Once verified, payment is released to the exporter, often via wire transfer.
- 05
Importer pays the bank, takes the goods
The importer pays the issuing bank under the agreed terms, immediately or on credit terms. The bank releases the shipping documents, allowing the importer to take delivery of the goods.
Other trade finance instruments (bonds, guarantees, insurance) follow different mechanics but share the principle of using bank or insurance documents to allocate risk between buyer, seller and finance provider.
Types of trade finance
Four core categories cover most UK trade finance needs. The right instrument depends on the deal size, the country, the relationship between the parties, and the specific risk you are managing.
- Letters of credit
- A legally binding bank guarantee that the exporter will be paid once they deliver according to the agreed terms and present compliant documents. The most common trade finance instrument. Used when buyer and seller are in different jurisdictions and do not have an established trading history. In some countries, letters of credit are a legal requirement for international transactions.
- Bonds and guarantees
- Bank-issued guarantees that protect a counterparty if you fail to perform under a contract. Common forms include advance payment bonds (protecting the buyer's deposit), performance bonds (guaranteeing delivery), and warranty bonds (covering post-delivery defects). Often required as part of overseas contract bids.
- Export credit insurance
- An insurance policy that protects a UK exporter against the risk that an overseas buyer does not pay (commercial risk) or that political events prevent payment (political risk). Particularly relevant for sales into emerging markets or to new customers. Provided commercially or through UKEF.
- Trade working capital and factoring
- Funding to cover the production, shipment, or post-shipment period before the buyer pays. Pre-shipment finance funds raw materials and production. Post-shipment finance bridges the gap between dispatch and payment. Export factoring sells invoices to a factor for immediate cash, usually advancing up to 95% of invoice value.
Trade finance vs supply chain finance vs invoice finance vs purchase order finance
These four products are often confused. They all help businesses manage trade cash flow, but they sit at different points in the trade cycle and address different risks.
| Feature | Trade finance | Supply chain finance | Invoice finance | Purchase order finance |
|---|---|---|---|---|
| Trade scope | International (cross-border) | Domestic or international | Mostly domestic | Domestic or international |
| When in the trade cycle | Before, during and after shipment | After invoice approved | After invoice issued | Before goods produced or shipped |
| Primary risk addressed | Cross-border payment and political risk | Supplier early payment, buyer payment terms | Slow customer payment | Cost of fulfilling confirmed order |
| Who initiates | Importer or exporter | Buyer | Supplier | Supplier (with confirmed PO) |
| Government backing available | Yes (UKEF for UK exports) | No (commercial only) | No (commercial only) | No (commercial only) |
| Typical deal size | £50,000 to £50,000,000+ | £10,000 to £10,000,000+ | £1,000 to £10,000,000+ | £25,000 to £5,000,000+ |
| Complexity | High (documentation-heavy) | Medium | Low to medium | Medium to high |
| Best for | Importers and exporters trading internationally | Suppliers selling to corporate buyers | Most UK SMEs with B2B sales | Resellers fulfilling confirmed orders |
Indicative ranges. Actual terms vary by lender, country, and the specific trade structure.
UKEF and government-backed support for UK exporters
Many UK SMEs do not know that government-backed trade finance is available. UKEF (UK Export Finance) can guarantee or insure trade finance facilities that commercial banks would not otherwise provide, particularly for exports into emerging or higher-risk markets.
What is UKEF? UK Export Finance is the UK government's export credit agency. Established in 1919 (the world's first export credit agency), UKEF supports UK exporters by guaranteeing or insuring trade finance facilities provided by commercial banks, and by directly providing insurance to UK exporters.
Why it matters. Some overseas trades are commercially uninsurable, or banks will not lend without a guarantee. UKEF steps in where the private market cannot, enabling UK businesses to win and deliver contracts that would otherwise fall through. In April 2023, UKEF's maximum exposure limit was raised from £50 billion to £60 billion. The agency supports exports in over 60 pre-approved local currencies.
What UKEF can do
- Bond support scheme
- UKEF can guarantee a portion of a contract bond (advance payment, performance, warranty) issued by a UK bank, freeing up the exporter's working capital that would otherwise be tied up as security.
- Export working capital scheme
- UKEF can guarantee up to 80% of a UK bank's loan to a UK exporter, enabling banks to lend working capital against export contracts they would otherwise decline.
- Export insurance policy
- Direct insurance from UKEF against the risk of non-payment by an overseas buyer, where commercial insurance is unavailable or unaffordable.
- Buyer credit and supplier credit
- Larger facilities that allow overseas buyers to borrow from UK banks (with UKEF guarantees) to pay UK exporters upfront, useful for capital equipment exports and infrastructure projects.
Eligibility. Generally, UKEF support requires that the underlying export is from a UK business and meets UK content requirements (often 20% UK value-add, though this varies by scheme). Larger schemes have minimum deal sizes. Smaller exporters can access bond support and export working capital from £25,000 upwards.
How FundingLinks helps. When you enquire through FundingLinks, we will identify whether UKEF support is available and applicable to your situation, and connect you to UK banks on our panel that are accredited UKEF delivery partners. UKEF is not a direct lender, it works through commercial banks.
What does trade finance cost?
Trade finance pricing varies more than any other product in FundingLinks' panel, because the instruments, markets and risks differ so widely. Indicative ranges:
01 Letter of credit fees
Typically 0.25% to 0.5% of the LC value in developed markets, rising to 2% to 4% in emerging markets. SMEs typically pay roughly twice the rates that large corporates pay.
02 Bonds and guarantees
Annual fees typically 0.5% to 2% of the bond value, plus issuance fees. Higher for emerging market counterparties.
03 Export credit insurance
Premiums vary by country risk, buyer credit profile, and policy structure. Typical range 0.3% to 2% of insured turnover.
04 Trade working capital
Interest rates broadly similar to commercial loans, typically 6% to 15% p.a. depending on security, country risk and term.
05 Documentation and admin fees
Trade finance is documentation-heavy. Expect handling fees per transaction, courier costs for physical documents, and possibly translation costs.
06 Compliance costs
Trade finance requires extensive AML and sanctions checking. Banks build these costs into pricing. Some smaller deals are uneconomic for commercial banks because of compliance overhead, which is where UKEF support or specialist lenders become important.
This is general guidance, not tax, regulatory or accounting advice. Trade finance carries specific compliance, regulatory and tax considerations that vary by country, instrument, and your business circumstances. Always speak to a qualified accountant, tax adviser, and trade finance specialist before committing.
Is trade finance right for your business?
Trade finance suits established UK businesses managing the risks and cash flow of cross-border trade. These five points help you judge the fit.
-
You are importing or exporting goods or services
Trade finance is built for international transactions. If your buyers and suppliers are all UK-based, products like invoice finance, supply chain finance or business loans are usually more appropriate.
-
You have established trading history
Most trade finance instruments require the UK party to be an established business with assets, trading history, and a clean credit profile. Newer startups often struggle to access trade finance unless backed by UKEF.
-
The deal value justifies the documentation
Trade finance is documentation-heavy. Letters of credit and bonds have admin costs that make very small deals uneconomic. Most lenders set minimum deal sizes from £25,000 upwards.
-
You need to manage cross-border payment risk
If you are selling into a country or to a buyer where payment is uncertain, a letter of credit, bank guarantee, or export credit insurance can transfer that risk to a bank or insurer.
-
You can dedicate time to the application
Trade finance applications are more involved than other commercial finance products. Expect to provide contracts, shipping documents, buyer due diligence, and country information. Allow more time than for a domestic loan.
Pros and cons of trade finance
Trade finance can open up markets you could not otherwise serve safely, but it is slower and more documentation-heavy than domestic funding.
Pros
- Enables trade with buyers and markets you would not otherwise serve safely
- Shifts cross-border payment risk from your business to a bank or insurer
- Preserves working capital by spreading payment timing through pre-shipment and post-shipment finance
- UKEF support can unlock deals that commercial markets will not finance
- Letters of credit are globally recognised, governed by the ICC UCP 600 standard
- Strengthens your offering to overseas buyers, who may prefer or require LC-backed terms
Cons
- Documentation-heavy, applications take longer than other commercial finance products
- Costly compared to domestic alternatives, particularly into emerging markets and for SMEs
- Strict compliance requirements (AML, KYC, sanctions) can slow deals significantly
- Some countries and buyer profiles are uninsurable or unfinanceable commercially
- Smaller deal sizes are often uneconomic due to fixed compliance and admin overhead
- Some instruments (forfaiting, structured trade) are highly specialised and require expert advice
How FundingLinks helps with trade finance
We identify the right instrument, check whether UKEF support applies, and stay involved through to issuance and payment.
- 01
Tell us about your trade
Share your business details, the country you are trading with, the goods or services involved, the deal value, and whether you are importing or exporting.
- 02
We identify the right route
Trade finance is not one product. We will identify which instrument fits (letter of credit, bond, insurance, working capital), and whether UKEF support is available and applicable.
- 03
We compare lenders and UKEF delivery partners
We compare offers from commercial trade finance lenders on the panel, including UK banks that are accredited UKEF delivery partners.
- 04
Through to issuance and payment
Trade finance deals involve more documentation than other commercial finance products. We stay involved through documentation, drawdown, and (where relevant) shipment and presentation of documents.
Why businesses choose FundingLinks
Specialist support for UK importers and exporters comparing trade finance, export finance and working capital options.
- 100+
- UK lenders compared
- 500+
- SMEs funded
- 35+ years
- Combined commercial finance experience
Specialist, founder-led support
Founded by Sam Wells and Chris Findlow, with 35+ years' combined experience in commercial finance. You speak to specialists, not a call centre.
Clear process, secure portal
Track your enquiry, review lender offers and exchange documents in one secure portal. No email chains, no spreadsheets, full visibility from enquiry to drawdown.
Free to compare, success-based fees
No upfront charge to use FundingLinks. Fees apply only if you proceed with a facility, and they are agreed in writing before you commit.
Trade finance FAQs
Direct answers to the questions importers and exporters usually ask about trade finance.
What is trade finance?
Trade finance is the umbrella term for the financial instruments and products that make international trade work. It includes letters of credit, bank bonds and guarantees, export credit insurance, and pre-shipment and post-shipment working capital. The common thread is using bank or insurance documents to manage payment and performance risk between buyers and sellers in different countries.
Is trade finance the same as export finance?
Largely yes. Export finance is the term often used when the focus is on a UK business selling overseas, while trade finance is the broader umbrella that also covers UK businesses buying from overseas (import finance). The instruments are similar, the perspective differs.
What is a letter of credit?
A letter of credit is a legally binding bank guarantee that the seller will be paid once they deliver the agreed goods or services according to the contract and present the required documents (shipping documents, bills of lading, certificates of origin). It is the most common trade finance instrument and is governed by the ICC UCP 600 rules globally.
What is UK Export Finance (UKEF)?
UKEF is the UK government's export credit agency, established in 1919. It supports UK exporters by guaranteeing or insuring trade finance facilities provided by commercial banks, and by directly providing insurance against non-payment by overseas buyers. UKEF is not a direct lender, it works through accredited UK bank delivery partners. Its maximum exposure was raised to £60 billion in 2023.
How is trade finance different from supply chain finance?
Trade finance is built around managing the risks of cross-border trade, particularly through instruments like letters of credit and bonds. Supply chain finance is built around accelerating supplier payment using a buyer's credit rating, mostly in domestic or already-established trade flows. The two products can sometimes complement each other in the same trade.
How is trade finance different from invoice finance?
Invoice finance advances cash to a supplier against unpaid invoices they have already issued, mostly domestically and based on the supplier's own profile. Trade finance addresses the risks of cross-border trade through documents and guarantees, often before the invoice is even issued. For a UK exporter, the two can be combined: trade finance protects the deal, invoice finance accelerates cash flow once the invoice exists.
How much does a letter of credit cost?
Letter of credit fees typically range from 0.25% to 0.5% of the LC value in developed markets, rising to 2% to 4% in emerging markets. SMEs usually pay roughly twice the rates that large corporates pay. Each LC also incurs handling, courier and document checking fees. Pricing varies significantly by bank, country, and the specific LC terms.
Can a small business access trade finance?
Yes, but with some constraints. Most trade finance instruments require at least a year or two of trading history, a clean credit profile, and a minimum deal size (often from £25,000). SMEs without those credentials may struggle to access commercial trade finance. UKEF's bond support scheme and export working capital scheme are designed specifically to help smaller UK exporters access trade finance.
What documents do I need for trade finance?
It depends on the instrument, but typical documents include: the export or import contract, commercial invoice, packing list, bill of lading or air waybill, certificate of origin, insurance documents, and any sector-specific certifications. Letter of credit applications also require the LC application form and any supporting bank documentation. Trade finance is documentation-heavy by design.
Is trade finance regulated by the FCA?
Most commercial trade finance to UK businesses for business purposes is unregulated by the FCA. However, banks providing trade finance are subject to extensive AML, KYC, sanctions and capital requirements regulation, which significantly affects pricing and speed of delivery. FundingLinks operates exclusively on unregulated commercial trade finance for UK businesses.
Are trade finance costs tax deductible?
Trade finance fees, interest, and insurance premiums are generally treated as business expenses and deductible in the normal way. This is general guidance, not tax advice. The specific tax treatment of trade finance costs depends on your business structure and circumstances. Always speak to a qualified accountant or tax adviser.
How long does it take to set up trade finance?
A straightforward letter of credit for an established trade can be issued within a few days. New facilities, larger structured trade finance deals, or anything involving UKEF can take several weeks because of due diligence, compliance, and documentation requirements. Trade finance is generally slower to arrange than domestic commercial finance.
Related products
Other funding options that can work alongside, or instead of, trade finance.
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Written by
Sam Wells
Co-Founder, FundingLinks
Sam Wells co-founded FundingLinks alongside Chris Findlow, after more than 10 years in invoice finance and alternative lending, including senior broker and partnership roles at Kriya. He helps SMEs access competitive funding by matching them with the right lender, product and structure for their stage of growth.
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