Trade finance is the set of products banks and other lenders use to fund and secure international trade: letters of credit, documentary collections, supply chain finance, invoice finance, export credit insurance and contract bonds. It bridges the gap between an exporter wanting to be paid on shipment and a buyer wanting to pay on delivery. In the UK, the government's export credit agency, UK Export Finance (UKEF), backs many of these facilities with partial guarantees, typically covering up to 80% of the lender's risk.
The problem trade finance solves
An international sale carries extra risks: the buyer is in another legal system, the goods are in transit for weeks, and the currency may differ. The exporter worries about not being paid; the importer worries about paying for goods that never arrive. Trade finance puts a bank, a document or an insurer between the two, and often turns the receivable into cash earlier.
The main instruments
| Instrument | How it works | Who carries the payment risk |
|---|---|---|
| Letter of credit | The buyer's bank undertakes to pay the exporter if documents complying with the credit's terms are presented | The issuing bank (and a confirming bank, if the credit is confirmed) |
| Documentary collection | Banks pass the shipping documents to the buyer only against payment or acceptance of a bill of exchange | The exporter: the banks do not guarantee payment. Once the buyer accepts the bill it is legally liable on it, but it can still fail to pay at maturity |
| Supply chain finance | A bank pays a supplier's approved invoices early, at a discount, and the buyer pays the bank at the invoice due date | The bank, relying on the buyer's credit |
| Invoice finance | A lender advances cash against the exporter's unpaid invoices | The exporter, unless the facility is non-recourse |
| Export credit insurance | An insurer pays out if the buyer fails to pay | The insurer, up to the insured percentage |
| Contract bonds | A bank guarantees to the buyer that the exporter will perform the contract or repay an advance payment | The bank, usually against collateral from the exporter |
A letter of credit protects the exporter only if the documents presented match its terms. A discrepancy, such as a late shipment date or a description that differs from the credit, can hold up payment until the buyer agrees to waive it.
Since the Electronic Trade Documents Act 2023, documents such as bills of exchange and bills of lading can exist in electronic form, and an electronic trade document that meets the Act's conditions "has the same effect as an equivalent paper trade document".
UK Export Finance products
- General Export Facility. Partial guarantees to banks for trade loans, bonding and letter of credit lines of up to around £25 million, with repayment terms of up to 5 years. No individual export contract has to be evidenced. The exporter must have made at least 20% of turnover from UK export sales in any one of the last three financial years, or at least 5% in each of them;
- Export Working Capital Scheme. Guarantees of up to 80% of the risk on pre- and post-shipment working capital for specific export contracts, with no minimum or maximum facility size;
- Bond Support Scheme. A guarantee of up to 80% of the value of a contract bond, so the bank needs less cash collateral from the exporter;
- Supply Chain Discount Guarantee. Covers up to 80% of the risk on supply chain finance facilities that let an exporter's suppliers be paid early;
- Export Insurance Policy. Cover for up to 95% of losses under an export contract, for example on buyer insolvency or political events, where private insurance is not available. There is no minimum contract value;
- Buyer Credit Facility. A guarantee to a bank lending to the overseas buyer, so the exporter is paid as if it were a cash contract while the buyer repays over 2 years or longer.
Larger exporters can use the Export Development Guarantee, which supports general working capital or capital expenditure loans from £25 million, with guarantees of up to 80%.
What Budget 2026 announced
Budget 2026, published on 28 October 2026, announced three export finance measures:
- A new SME guarantee. A UKEF guarantee delivered jointly with the British Business Bank for SMEs that export or intend to export, to launch in 2027;
- General Export Facility changes. Eligibility widened to include new exporters, and quicker access for lenders to guarantees of up to £15 million;
- Flexible Finance pilot. Up to £5 billion of guarantees covering up to 80% of eligible loans to selected overseas buyers who buy from UK suppliers.
Until the changes are implemented, the current GEF eligibility test above still applies.
Worked example: what an 80% guarantee does
A UK manufacturer wins a £1.2 million overseas contract and needs £600,000 of working capital to buy materials and pay staff before shipment. Its bank is willing to lend but not to take all the risk.
- With an Export Working Capital Scheme guarantee of 80%. UKEF covers £480,000 of the bank's risk on the facility;
- The bank's own exposure. £600,000 − £480,000 = £120,000;
- The exporter's position. It still owes the bank the full £600,000. The guarantee protects the lender, so the exporter should also consider export insurance or a letter of credit against the risk of the buyer not paying.
Risks and accounting points
- Documentary risk. Discrepant documents can delay or block payment under a letter of credit;
- Counterparty and country risk. The buyer, the buyer's bank or the buyer's government may fail to pay or block transfers;
- Currency risk. A sale invoiced in a foreign currency can lose value before payment;
- Fraud. GOV.UK's guidance on international trade advises agreeing secure payment methods, such as documentary collections and letters of credit, and keeping complete records;
- Presentation. Advances against invoices, and supply chain finance arrangements, raise questions about whether the business is reporting borrowings or trade creditors. Our guide to trade debtors covers when receivables stay on the balance sheet.
For the customs side of an international sale, see our guides to importing goods into the UK and tariffs.
Primary sources: UKEF guidance on the General Export Facility, Export Working Capital Scheme, Bond Support Scheme, Supply Chain Discount Guarantee, export insurance, Buyer Credit Facility and Export Development Guarantee, the Electronic Trade Documents Act 2023, GOV.UK on fraud prevention in international trade and Budget 2026.
If you are planning export growth, our financial modelling team can build the cash flow forecast a lender or UKEF will ask for, and our international VAT advisers can check the VAT on cross-border sales.