Trade finance
Trade finance: funding to pay suppliers before you're paid
Many businesses have to pay a supplier long before their own customers pay them, especially when goods come from overseas and spend weeks in transit. Trade finance is funding that covers that gap: it pays the supplier, or funds the payment, and the business repays once the goods are sold or on agreed terms. This page explains how it works, the main types, and how it differs from stock and invoice finance.
Some trade finance tools, such as letters of credit, are arranged through your bank. This page explains how they work so you know what to ask for.
If your business is buying goods for resale or to fulfil orders, Wize Finance can help you explore which funding options may fit the trade cycle.
Share who your suppliers and customers are and the amount you need. The team reviews your enquiry and discusses how your trade cycle might be funded.
What is trade finance?
In everyday business use, trade finance means funding linked to buying goods: paying a supplier, covering goods while they’re shipped, and bridging the time until they’re sold. It can involve UK suppliers as well as overseas ones.
The term also covers banking tools used in international trade, such as letters of credit and guarantees, which help a buyer and seller in different countries trust each other to pay and deliver.
Most small and medium-sized businesses meet trade finance in one of these ways:
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Paying a supplier:
a provider pays the supplier, or funds the payment, and the business repays later
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Importing goods:
funding that covers the period between paying an overseas supplier and the goods arriving and selling
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Exporting goods:
funding and bank tools that help a business sell overseas and get paid
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Supplying a large customer:
taking part in a customer’s supply chain finance programme (see Supply chain finance)
Where trade finance fits
Buying goods to sell creates a gap between cash going out and cash coming in. Different types of finance cover different parts of that gap.
- 01
Order placed.
You agree to buy goods from a supplier.
- 02
Supplier paid.
The supplier wants paying, often before it ships.
- 03
Goods in transit.
The goods are on their way, sometimes for weeks.
- 04
Goods arrive and are held.
You hold the stock until it sells.
- 05
Sold or invoiced.
You sell the goods, or invoice a business customer.
- 06
Customer pays.
Cash finally comes back in.
Which part of the trade cycle each type of finance covers
Trade finance
- Which part of the cycle
- Paying the supplier and covering goods in transit, sometimes until they sell
- What it’s usually linked to
- A specific supplier payment or shipment
Stock finance
- Which part of the cycle
- Goods you already hold, until they sell
- What it’s usually linked to
- Stock you’re buying or holding → Stock Finance
Invoice finance
- Which part of the cycle
- After you’ve invoiced a business customer, until they pay
- What it’s usually linked to
- Your unpaid invoices → Invoice Finance
The main types of trade finance
-
Supplier payment funding:
a provider pays your supplier, in the UK or overseas, or funds the payment, and you repay later, often once the goods have sold or by an agreed date. Some providers offer this as a revolving facility you use for each purchase.
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Import finance:
supplier payment funding for goods bought from overseas, often covering the time the goods spend in transit.
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Funding a confirmed customer order:
where you’ve won an order and need to pay a supplier to fulfil it, purchase order finance may be relevant. It’s explained on Stock Finance.
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Letters of credit and guarantees:
banking tools that give a seller confidence they’ll be paid, or a buyer confidence the seller will deliver. See Letters of credit and bank guarantees.
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Export funding:
ways to fund and protect sales to overseas customers. See Trade finance for exporters.
Paying overseas suppliers
Overseas suppliers often want paying before goods are shipped, or on shipment. The goods may then spend weeks in transit and clearing customs before you can sell them, so your cash can be tied up for much of the trade cycle.
Import finance can cover that period. Typically:
- The provider pays your supplier, or funds the payment, once the order and documents are agreed.
- The goods are shipped and arrive.
- You sell the goods.
- You repay the provider, on the sale or by an agreed date, with its fees or interest.
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Once the goods have landed and you’re holding them, stock finance may be more relevant. See Stock Finance.
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Currency: paying overseas suppliers can mean exchange-rate risk. Foreign exchange services are separate from trade finance, and this page doesn’t cover them.
Letters of credit and bank guarantees
Some trade finance isn’t a loan. It’s a promise from a bank that helps a buyer and seller in different countries trust each other.
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Letter of credit:
a legally binding guarantee from a bank that a seller will be paid, as long as the goods are delivered and the documents meet the agreed terms. It’s useful when the buyer and seller are in different countries and don’t yet know each other.
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Bonds and guarantees:
a bank guarantees that you’ll meet your side of a contract, for example an advance payment or performance bond. An overseas buyer may ask for one.
These are usually arranged through your business’s bank, and the bank will want to understand the trade, the documents and your business. Talk to your bank about whether they suit your trade.
Trade finance for exporters
If you sell overseas, the challenge is often getting paid, and having enough working capital to fulfil the order in the first place.
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Selling on credit terms? If you invoice overseas business customers, invoice finance may help you release cash tied up in unpaid invoices. See Invoice Finance.
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Fulfilling a large export order? Some banks offer trade loans and bonding for exporters.
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UK Export Finance (UKEF) is the UK’s export credit agency. It works in partnership with banks and brokers and can support working capital loans and insurance against buyer default for UK exporters. Its regional Export Finance Managers can help you understand the options.
Wize Finance isn’t part of UK Export Finance and doesn’t offer access to its schemes.
Insurance against a customer not paying (trade credit insurance) is a separate insurance product, and this page doesn’t cover it.
Supply chain finance (reverse factoring)
Supply chain finance, also called reverse factoring, is set up by a buyer (usually a large company) for its suppliers. When the buyer approves a supplier’s invoice, the supplier can choose to be paid early by the buyer’s finance provider. The buyer then pays the provider when the invoice falls due. Because the cost is based on the buyer’s credit rating, it can be cheaper for the supplier than other funding.
How it differs:
- Trade finance
From trade finance:
trade finance helps you pay your suppliers. Supply chain finance helps suppliers get paid early by their customer’s programme.
- Invoice finance
From invoice finance:
with invoice finance, you arrange funding against your own unpaid invoices, across your customers. With supply chain finance, the buyer sets up the programme, and only invoices the buyer has approved are funded.
Can I apply for it? Not on your own. If you supply a large business, ask whether it runs a supply chain finance programme. If it doesn’t, invoice finance may be the closer option for funding your own invoices.
The programme is set up by
the buyer
What providers may look at
Every provider sets its own criteria, but trade finance applications commonly involve:
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Your business: trading history, accounts and how it has managed previous trade
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The goods: what they are, what they’re worth and how easily they could be sold
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Your supplier: who and where they are, their track record and payment terms
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Your customers: who buys the goods and on what terms
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The trade cycle: how long from paying the supplier to being paid yourself
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Shipping and documents: the terms of trade, insurance and the paperwork for each shipment
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Security and guarantees: some providers may take security over the goods, and some may ask for personal guarantees
Trade finance, stock finance or working capital?
Trade finance compared with stock finance, invoice finance, a working capital loan and a business line of credit
Trade finance
- What it funds
- Specific supplier payments and goods in transit
- Linked to
- A purchase or shipment
- Often suits
- Importers, wholesalers and product businesses with regular supplier payments
Stock finance
- What it funds
- Stock you’re buying or holding until it sells
- Linked to
- The stock
- Often suits
- Businesses buying stock ahead of sales
Invoice finance
- What it funds
- Unpaid invoices to business customers
- Linked to
- Your sales ledger
- Often suits
- Businesses selling to other businesses on credit
Working capital loan
- What it funds
- General cash flow
- Linked to
- The business
- Often suits
- A one-off cash need
Business line of credit
- What it funds
- Any business purpose, as needed
- Linked to
- A revolving limit
- Often suits
- Recurring, varied needs
Related: Working Capital Loans · Business Line of Credit
Buying equipment rather than goods to sell? That’s usually Asset Finance.
Costs to compare
Trade finance FAQs
What is trade finance?
It’s funding linked to buying goods: paying a supplier, covering goods while they’re shipped and bridging the time until they’re sold. It also includes banking tools, such as letters of credit, used in international trade.
Is trade finance only for importing and exporting?
No. Some providers also fund payments to UK suppliers. It’s most often used where goods come from overseas, because the gap between paying and being paid is longer.
What’s the difference between trade finance and stock finance?
Trade finance usually covers paying the supplier and the time goods spend in transit. Stock finance usually covers stock you’re buying or already hold, until it sells. Some businesses use both, one after the other.
What’s the difference between trade finance and invoice finance?
Trade finance helps you pay your suppliers before you’ve sold the goods. Invoice finance releases cash from invoices you’ve already sent to business customers.
What is a letter of credit?
It’s a bank’s legally binding guarantee that a seller will be paid, as long as the goods are delivered and the documents meet the agreed terms. Letters of credit are usually arranged through your business’s bank.
What is supply chain finance, and can I apply for it?
It’s a programme set up by a large buyer that lets its suppliers be paid early on approved invoices. You can’t apply on your own. Ask your customer whether it runs one.
Can UK Export Finance help my business?
UK Export Finance is the government’s export credit agency. It works with banks and brokers to support UK exporters. Check its guidance or speak to an Export Finance Manager.
Will the provider take security over the goods?
Some may, and some may also ask for personal guarantees. Requirements vary by provider and by trade, so check exactly what’s covered before you agree.
Can Wize Finance arrange trade finance?
If your limited company is trading and buys goods for resale or to fulfil orders, Wize Finance can help it see which types of business finance may suit. Letters of credit and UKEF support are arranged through banks.
Planning your next shipment?
Start with your supplier’s payment terms, your shipping timeline and when your own customers pay. Share those with us, and Wize Finance can talk through which funding options may fit each part of the cycle.
- your supplier’s payment terms
- your shipping timeline
- when your own customers pay