What is international trade finance? A guide for SMEs

When you’re running a small business, international trade can feel daunting when you get started – one day you’re handling domestic orders, the next you’ve got overseas customers asking for extended payment terms while your suppliers still want paying upfront! It’s a classic cash flow squeeze that stops lots of SMEs from doing more business abroad.

International trade finance exists to solve exactly this problem. It bridges the gap between when you need to pay suppliers and when your customers pay you, while also protecting you from the unique risks that come with trading across borders – from currency fluctuations to extended shipping times.

Exports are big business. Over 115,000 UK businesses export goods to the rest of the world. And 99% of them are SMEs – businesses with less than 250 employees. So access to international trade finance is crucial for the growth of your business and the wider UK economy too.

In this guide, we’ll break down everything you need to know about trade finance – from the basics through to how you can get started.

Key points:

• Trade finance helps manage cash flow gaps and reduces payment risks when trading internationally

• SMEs can access various options including trade credit, letters of credit and export loans

• Funding Options by Tide can connect you with over 120 lenders to find the right trade finance solution

What is international trade finance?

International trade finance is funding specifically designed to help businesses navigate the complexities of buying, selling and getting paid when trading across borders.

Unlike regular business loans that look at your balance sheet to decide if you qualify, trade finance is built around your actual export orders and international invoices.

For example, when a German customer wants 60-day payment terms but your Chinese supplier needs paying within 7 days, trade finance fills that 53-day gap.

The big difference from standard business finance is that trade finance providers are interested in your international trading relationships and export purchase orders, not just your credit history. And this makes it a particularly valuable option for newer businesses that have limited trading history but genuine international opportunities.

Trade finance isn’t suitable for every business, since it requires confirmed international orders and the ability to manage cross-border documentation and compliance requirements. We’ll cover this more below.

The challenges of international trade

Before we look at the types of trade finance available, it’s worth considering some of the specific international challenges that make cross-border trade more complex than domestic business:

• Extended shipping and transit times that can stretch payment cycles by weeks or months

• Currency fluctuation risks that can erode profit margins between order and payment

• Different legal jurisdictions making dispute resolution more complex

• Customs, duties and import/export documentation requirements

• Higher risk of non-payment due to unfamiliar international customers

• Political and economic instability in overseas markets

• Complex international banking relationships and correspondent banking delays

How trade finance works

Trade finance gives you the cash you need to pay suppliers upfront, then gets repaid when your international customers pay you.

Here’s a simple example:

1. You receive an order from an overseas customer, who’ll pay you in 30 days

2. You need to buy stock or materials from your supplier upfront to fulfil the order

3. You apply for trade finance

4. You receive trade finance funding to pay your supplier

5. You ship the goods to your international customer

6. You repay the trade finance when your customer pays you

The process usually takes around 30-90 days, but the exact length will depend on shipping times and payment terms plus any customs or documentation delays.

Why SMEs often use trade finance

Smaller businesses have to deal with several challenges when trading internationally, such as long payment cycles and unfamiliar overseas customers. Trade finance helps overcome these types of issues.

Some of the main reasons SMEs turn to trade finance are:

• Cash flow management: You can complete international orders without being out of pocket for months. For example, if your supplier wants paying in 7 days but your overseas customers pay in 60 days, that’s nearly two months of working capital tied up in each transaction – more if you add shipping time.

• Risk reduction: Trading internationally brings new risks that you don’t have to worry about domestically. This can include currency fluctuations, international political instability, custom delays or simply not knowing if a foreign customer will actually pay. Trade finance products often include protection against these risks.

• Growth enablement: SMEs often hit a ceiling where they can’t take on larger international orders because they don’t have the upfront capital or can’t afford to wait months for international payments to clear. Trade finance removes this barrier, letting you scale up without depleting your cash reserves.

• Competitive advantage: Offering longer payment terms to international customers can make your business more attractive in competitive overseas markets, but only if you can afford to wait for payment! Trade finance lets you compete on terms while maintaining a healthy cash flow.

However, trade finance isn’t always easy to access. There’s a huge demand for trade finance globally. Data shows the global trade finance gap (the difference between what businesses need and what they can actually get) grew to $2.5 trillion in 2022, which is creating a significant barrier for SMEs.

Which type of trade finance is right for your business?

There are three main types of trade finance, each suited to different business situations and needs.

Trade credit

Trade credit is the simplest form of trade finance. It essentially extends payment terms to your customers while you get paid upfront. Your trade finance provider pays your supplier immediately, then collects payment from your customer when the invoice is due.

Trade credit is typically interest-free, so your supplier won’t charge a fee or interest for the period the payment is deferred – so long as you pay within the agreed payment terms. It’s a bit like an interest-free loan, but without having to negotiate terms with each supplier individually.

Benefits:

• Works well for established international trading relationships where you trust your customers to pay

• Particularly useful for regular, repeat orders where you want to offer competitive payment terms to overseas buyers

• No administrative burden, unlike more complex products

• Typically interest-free if you pay within agreed terms

• Simple to set up and manage compared to some other trade finance options

Downsides:

• You remain liable if customers don’t pay – if your overseas customer defaults or becomes insolvent, you’re still responsible for repaying the trade finance provider

• Limited protection against currency fluctuations between agreeing the deal and receiving payment

• Relies on customer creditworthiness, which can be harder to assess with overseas buyers

• Can tie up your credit limit, limiting your ability to take on other opportunities

Letters of credit

A letter of credit is a guarantee from a bank that payment will be made once certain conditions are met – usually that specific documents prove the goods have been shipped and meet the requirements you agreed.

The process typically takes around 2-4 weeks to arrange initially, then 5-10 days to process payment once documents are submitted. You'll typically pay your bank 0.5-2% of the transaction value, plus documentation fees.

Benefits:

• Particularly valuable for larger orders with new overseas customers where you need payment security

• Offer stronger protection for both you and your customer, since payment is guaranteed by international banks

• You get paid even if your customer hasn’t settled with their bank yet

• Gives you confidence when dealing with unfamiliar overseas markets and different legal jurisdictions

• Reduces the risk of non-payment

Downsides:

• Any discrepancy in paperwork (even spelling errors) could delay or block payment – bear in mind that international documentation requirements are often more complex

• Higher fees can make letters of credit not worth it for smaller orders

• Requires a lot of paperwork and expertise to manage properly

• There can be potential delays if document verification takes longer than expected

• You’re ultimately relying on the creditworthiness of your customer’s bank in a different regulatory jurisdiction

Export loans

Export loans provide working capital to complete orders you’ve already won for overseas customers. Unlike general business loans, they’re secured against the export contract itself, which often makes them easier to obtain and cheaper than unsecured borrowing.

Interest rates vary but are often around 2-5% above the Bank of England’s bank rate, with terms matching your production and payment cycles – usually 3-12 months. Some export loans also include currency hedging, which can protect you if exchange rates change for the worse between taking the order and receiving payment from your international customer.

Benefits:

• Ideal for manufacturers or businesses that need to spend money on production before shipping to international customers

• Can be easier to obtain than general business loans as they’re secured against confirmed export contracts

• Cheaper than unsecured borrowing due to the security provided

• Terms can match your production and payment cycles

• Some include currency hedging to protect against exchange rate fluctuations

• Provides upfront funds for production costs, raw materials or stock purchases

Downsides:

• Personal guarantees are often required from directors, which puts personal assets at risk

• Interest costs accumulate throughout the loan period, unlike interest-free trade credit

• You have to repay the loan even if your customer doesn’t pay, defaults or disputes the order

• There’s limited flexibility since funds are tied to specific export contracts

• Currency hedging comes at additional cost that can reduce profit margins

• Lenders may ask for additional security beyond the export contract, limiting your capacity for other borrowing

How to apply for trade finance

Most trade finance applications start with a confirmed purchase order or export contract since lenders want to see real international trading activity rather than speculative borrowing.

What you’ll need:

• 12-24 months of business accounts

• Details of your international trading history

• Information about your overseas customers and suppliers

• Evidence of domestic trading experience (if you’re new to exporting)

• Proof of export licences or international trade compliance where required

The application process:

1. The lender will review your business and the specific international transaction

2. You provide paperwork about the export order and your business

3. Once approved, the lender sets up your trade finance facility

The application should take around 2-4 weeks for initial approval, then 3-5 days to process individual transactions once your facilities are in place.

You’ll need to provide various documents throughout the process (such as export invoices, shipping documents and proof of goods delivery) with specific requirements depending on which stage you’re at and which type of trade finance you’re using.

Your trade finance provider may ask you to provide personal guarantees from your business directors. They may also ask you to take out export credit credit insurance or provide additional security depending on the countries and customers involved.

Other finance options

International trade finance isn’t the only way to fund overseas trading. If you need different types of support or can’t access traditional trade finance, you could also consider the following options.

• UK Export Finance (UKEF): The government's export credit agency offers exporters guarantees, insurance and direct lending. Their Export Development Guarantee can back up to 80% of your bank’s lending, helping make trade finance easier for you to access. They provided £8.8 billion of support in 2023-24.

• Specialist trade finance: This often offers more flexible terms than high street banks, particularly for newer exporters. These specialists understand international trade better than general business lenders and can structure deals around your specific export needs.

• Invoice finance: Many providers now offer trade finance alongside their core factoring services. If you’re already using invoice finance domestically, it can feel like a natural next step to extend this to export invoices.

• Alternative lenders: Platforms like Funding Options by Tide can connect you with over 120 lenders, including specialists who understand international trade finance when traditional banks can’t help.

Find business finance with Funding Options by Tide

Whether you’re looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, we’re one of the leading names in business finance in the UK, having helped facilitate over £800 million in finance to more than 18,000 customers. 

Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

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FAQs

Can I get trade finance if I'm new to exporting?

Yes, though you'll typically need 12+ months of domestic trading history and a confirmed export order. Some lenders specialise in helping businesses make their first international sales.

What happens if my overseas customer doesn't pay?

This depends on the product. Letters of credit protect you completely, whilst trade credit and export loans typically require you to repay regardless of whether your customer pays. Trade credit insurance can provide additional protection.

How does trade finance affect my existing banking relationships?

Trade finance providers usually work alongside your existing bank rather than replacing them. However, you should inform your main bank about new facilities as they may affect your overall credit arrangements.

Do I need to handle foreign exchange risk separately?

Yes, currency risk isn't typically covered by standard trade finance products. You'll need separate FX hedging or multi-currency accounts to manage exchange rate fluctuations effectively.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.