Trade finance: funding imports, exports and stock orders

Trade finance is funding that supports the buying, shipping and selling of goods, usually across borders, so a business can pay for an order before its customer pays it. UK Finance describes the sector as international trade products that help customers export and import effectively by mitigating risks, providing working capital and offering medium-term finance for overseas buyers.

It is a group of tools rather than a single product. UK Finance lists guarantees, international payments, trade finance and foreign exchange among the services its members offer. Which tool fits depends on whether you are the buyer or the seller, how long goods are in transit and how long your customer takes to pay.

The underlying problem is the one behind most cash shortages: money goes out before it comes in. Our guide to what working capital is explains why a longer gap between paying for goods and being paid means a business needs more funding.

Trade finance is tied to a specific trade or trading cycle, while an ordinary business loan is a lump sum you can spend on anything the lender allows. That link to real goods and real orders is why lenders often ask for contracts, purchase orders or invoices as part of the application.

Everything in the table is a general pattern. The terms of any facility are set out in the lender’s own agreement, so read them before you sign.

An importer has to pay the overseas supplier and then the UK costs of bringing goods in, which include Customs Duty and import VAT. GOV.UK’s step-by-step import guide says you need a GB EORI number to import goods into England, Wales or Scotland, and that your declaration must include the commodity code and the value of the goods, which together work out the duty and VAT you owe.

HMRC also lets importers delay some of that cash outflow. A duty deferment account allows you to postpone paying most customs charges, such as Customs Duty, excise duty and import VAT if you are not using postponed VAT accounting, and to make one payment a month by Direct Debit instead of paying for each consignment. HMRC’s page says it aims to complete an application within 30 working days once it has everything it needs.

That is a payment arrangement with HMRC, not borrowing, so it costs nothing in interest. It does not fund the supplier’s invoice, which is where finance comes in.

An exporter has to pay for materials, labour and shipping to fulfil an overseas order and then wait for the buyer to pay. UK Export Finance (UKEF) says its Export Working Capital Scheme is particularly useful when a UK exporter wins an overseas contract worth more than it can typically fulfil, or wins more overseas contracts than it has before.

GOV.UK’s export guidance also lists the practical steps: you need a GB EORI number, you should check whether you need to register for VAT, and you should check that the buyer is able to import the goods into their country. Each of those can affect when you are paid, which is why they belong in your cash plan alongside the finance.

Sales on credit to overseas customers can also be funded after the goods ship. Our guide to invoice finance explains how a lender advances money against invoices that customers have not yet paid.

The main tools are bank-provided trade facilities, working capital guaranteed in part by UKEF, invoice finance, asset-based lending, revolving credit and term loans, and each one covers a different point in the cycle. The table sets them side by side.

Several of these are explained in more depth elsewhere on the site, including asset finance and revolving credit facilities.

Yes, UKEF offers support that works through lenders and insurers rather than lending to you directly. It describes itself as the UK’s export credit agency, and its support is designed to complement the private sector.

• Export Working Capital Scheme. UKEF can provide partial guarantees covering up to 80% of the risk to lenders on export working capital facilities, before and after shipment. There is no minimum or maximum facility value. The exporter must carry on business in the UK, Isle of Man or Channel Islands and have a contract, or intend to enter one, with an overseas customer. You apply by discussing it with your bank.
• Export insurance. UKEF can insure up to 95% of potential losses under an export contract if the buyer fails to pay because they become insolvent, if the contract is terminated early, or if political events stop the export. It is for exporters who cannot get cover from the private sector, at least 20% of the export value must come from UK goods or services, and each policy covers one buyer.

Yes, a business can fund stock orders with finance that sits alongside its trading, including asset-based lending secured against stock, a revolving facility or a loan for a specific order. UK Finance describes asset-based lending as funding secured against a wider range of assets than invoices, and says those can include stock.

The right choice depends on how fast the stock sells and whether you need the money for one order or all year. Our guide to stock finance covers borrowing against inventory in detail, and supply chain finance covers the buyer-led alternative where a larger customer’s credit standing helps its suppliers get paid early.

Providers look at the trade as well as your business: who the customer is, what is being sold, the paperwork behind the order and whether the money can reasonably be repaid from the sale. Exact requirements differ by provider and by facility, so treat this as a checklist of things to have ready rather than a promise of what any lender will ask for.

• A signed contract, purchase order or confirmed order
• Your supplier’s pro-forma or invoice and the expected shipping arrangements
• Your recent accounts and a cash flow forecast covering the cycle
• Your registration details for customs, such as your EORI number
• Evidence of the customer’s standing and your history of trading with them

A cash flow forecast that shows the gap between paying the supplier and being paid is the single most useful document to prepare.

The main risk is that the finance has to be repaid whether or not the deal goes to plan. Goods can be delayed, a customer can pay late or refuse to pay, and exchange rates can move between the date you agree a price and the date money changes hands.

• Costs and fees vary by provider and facility, so compare the total cost, not only a headline figure.
• Security may be required over goods, receivables or other business assets, and a director may be asked for a personal guarantee.
• A facility tied to one contract can leave you short if the contract is delayed or cancelled.
• Paperwork errors can hold up customs clearance or a payment.

For the cost side of any offer, read how to compare business lenders before accepting terms.

Capzy is a credit broker, not a lender, and is paid by the lender. We do not arrange documentary trade instruments such as bank guarantees, so for those and for UKEF-backed facilities you should speak to your bank.

Where trade creates a cash gap, we can introduce you to lenders that offer invoice finance, asset finance, revolving credit or business loans. You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and all offers are subject to status and lender criteria. Capzy does not give legal, tax or customs advice, so ask an accountant or a customs adviser about duty, VAT and documentation.