What Is Trade Finance? A UK Business Guide

What is trade finance?

Trade finance is the umbrella term for funding solutions that bridge the gap between paying suppliers and getting paid by customers. Instead of one long-term loan, it uses short-term, self-liquidating facilities tied to real trade – purchase orders, invoices, shipments or stock.

For UK importers, exporters, manufacturers and wholesalers, trade finance is what keeps working capital moving when payment terms stretch to 60, 90 or 120 days. It lets you accept bigger orders, buy in larger volumes and expand into new markets without draining cash reserves.

How trade finance works

Every trade finance facility follows the same basic pattern: a lender advances funds against a verifiable trade event, the trade completes, and the advance is repaid from the sale proceeds. The structure varies by product, but the logic is the same – the trade itself is the collateral.

A typical import cycle might look like this: you place a purchase order, an import finance line pays your supplier, the goods ship and clear customs, you invoice your customer, and either the customer pays directly to the lender or an invoice finance facility settles the import line. Cash moves in a loop rather than sitting still.

The main trade finance products

Most UK businesses combine two or three of the following:

• Invoice finance – advances up to 90% of unpaid invoices within 24 hours (factoring or confidential discounting).
• Export finance – funds international sales, including credit-insured cover for overseas buyers.
• Import finance – pays overseas suppliers so you can secure stock without tying up your own cash.
• Purchase order finance – funds confirmed orders you'd otherwise have to turn away.
• Supplier finance – extends your payment terms while suppliers get paid early.
• Stock / inventory finance – funds goods sitting in a warehouse or in transit.
• Asset based lending – a structured facility combining receivables, plant, stock and property into one revolving line.

How much does trade finance cost?

Pricing sits in two parts: a service or arrangement fee, and a discount margin over the Bank of England base rate. For invoice finance, all-in costs typically range from 1.5% to 4% of turnover. Import and PO finance are quoted per transaction, usually 1%–3% per 30-day cycle. Asset based lending blends multiple margins depending on collateral type.

Because facilities revolve with your order book, real cost depends on utilisation – you only pay for what you actually draw. A well-structured facility often costs less than the working capital gain it releases.

Choosing the right facility

The right product depends on where your cash gets stuck. If customers pay slowly, start with invoice finance. If suppliers demand upfront payment, look at import or supplier finance. If you're turning away orders, purchase order finance is the fastest fix. If you have a mix of receivables, stock and equipment, an asset based lending facility can consolidate everything into one line at a better blended rate.

A specialist broker will map your cash conversion cycle against 30+ funders and shortlist those that match your sector, ticket size and structure – saving weeks of pitching to the wrong lenders.