Capital Thinking: Trade Finance - unlocking growth for business

Trade finance is a ‘catch-all’ term that refers to a range of financial products designed to bridge the gap between paying your suppliers and receiving payment from customers. It is typically used by companies involved in importing and exporting, to mitigate the risk of payment delays and cash flow constraints associated with cross-border trade.

Trade finance facilities are available to companies of all sizes, from large listed groups to mid-market firms and SMEs. Common trade finance solutions include: 

• Letters of credit: a payment guarantee from a lender (issued on a buyer’s behalf), promising the seller they will be paid once the transaction has been completed, provided the seller presents the required documents and complies with the terms and conditions
• Bank guarantees: the lender acts as a guarantor if the importer or exporter breaches their contract
• Invoice finance: advancing funds against unpaid invoices 
• Purchase order finance: paying suppliers once an order is confirmed
• Import and export finance: providing finance for cross-border sales
• Trade credit insurance: protecting a seller against non-payment from buyers
• Supply chain finance: lenders advance payments to suppliers, where lending decisions are based on the buyer’s creditworthiness

How trade finance can support firms

Utilising trade finance allows suppliers to get paid on time, while giving buyers more flexibility in the payment terms they offer their own customers. It can also allow firms to negotiate better terms with suppliers and build relationships with customers. By reducing counterparty risk, it lowers the barriers to trade, both domestic and international, enabling firms to expand into new markets. 

For importers and exporters in particular, trade finance facilities can generate more flexibility and additional debt capacity than other funding structures. Because advances are typically sized against the underlying trade flow, such as invoices, purchase orders or goods in transit, rather than against balance sheet metrics alone, businesses can often access headroom that a conventional lending structure would not support.

Many SMEs and mid-market firms may have found securing finance challenging because of a perceived higher credit risk. However, trade finance places more emphasis on the underlying transactions (eg invoices or goods in transit) alongside the financial performance of the company. 

As businesses navigate geopolitical uncertainty and disruption, many are re-evaluating their supply chains. Faster, more flexible financing is becoming more important than ever. 

Which lenders offer trade finance solutions?

Trade finance providers are typically banks or fintech platforms. More recently, we have also seen private credit providers and asset-based lenders take a more prominent role in the market. As private credit is subject to fewer regulatory capital constraints, these providers can offer greater flexibility in their facilities, but this may come at a higher cost.

The UK government also has a dedicated trade finance arm, UK Export Finance, which offers various guarantee schemes and insurance. These can increase a participating lender’s appetite to provide trade finance solutions to firms that otherwise would not be able to access these types of facilities.  

Modelling your working capital cycle is essential

To understand what trade finance solution is right for your business, it is important to map out your working capital cycle, from paying suppliers to collecting payment from customers. By understanding how many days you hold inventory, how long customers take to pay, and how long you can wait to pay suppliers, you can see where cash gets delayed and where funding support is needed. 

Modelling a variety of trade finance options against your working capital cycle helps businesses assess how different facility terms would affect liquidity under changing trading conditions. This becomes particularly valuable during periods of growth or volatility, when changes in customer payment terms, supplier pricing or shipping times can materially alter funding requirements.

Choosing the right trade finance partner

It can be hard for firms to choose which trade finance solution and lender are right for them. Lenders differ significantly in their methodologies, for example in advance rates, eligibility criteria, approaches to foreign exchange exposure and pre- and post-shipment finance. A new lender may offer a higher nominal limit on a facility but apply more restrictive eligibility rules, resulting in less effective headroom.

Engaging advisers who can model the options available across the trade finance market, and illustrate their impact on the business, helps firms select structures that genuinely support growth. 

For businesses that already have a trade finance facility, or are looking to refinance, it is important to review ongoing requirements. If the business profile has improved since facilities were first put in place, it may be appropriate to explore alternative solutions or providers. 

Specialist trade finance teams tend to sit apart from a bank's mainstream relationship or credit teams. Identifying and engaging the right specialists early is often what determines whether a facility is arranged quickly and on good terms. Once those teams are engaged, trade finance structures can be refinanced relatively quickly.

Case study: refinancing a UK-based exporting manufacturer

We recently advised a UK engineering and manufacturing group that exports the majority of its UK output and runs manufacturing operations overseas. It was funding a growing order book on a patchwork of legacy facilities: an export trade loan, a term loan and an overdraft. Global shipping disruption was stretching delivery times and working capital demands were rising as a result.

We mapped the group's working capital cycle across its UK and overseas operations, then modelled each funding option against it, including a UK Export Finance-backed facility for which the group qualified. The analysis showed the existing structure was itself the constraint. Cash was tied up in inventory and multi-currency receivables, and the business was covering customer-requested performance and warranty bonds with cash collateral rather than a bonding line.

We took the refinancing to market and ran a competitive process across banks and a range of asset-based lenders. The group secured facilities around 20% larger than the amount needed simply to refinance, releasing additional headroom for growth. This was paired with multi-currency banking matched to its US dollar, euro and renminbi flows.

To see how the right trade finance structure could free up headroom for growth in your business, contact Jon Bramwell , Christopher McLean or Gemma Sampson.