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Trade finance:
what it is and how it works.
Trade finance helps businesses bridge the cash flow gap that appears when they have to pay for goods before they can sell them and collect payment. This guide explains the main types of trade finance and how they differ from general short-term working capital credit.
The problem trade finance solves
When a business buys goods for resale, there is almost always a timing gap between when it pays for those goods and when it collects payment from the end customer. This gap — which might be days, weeks, or months depending on the trade cycle — creates a cash flow pressure.
Trade finance bridges that gap. It allows the buying business to:
- Pay the supplier on time (or guarantee payment to the supplier)
- Receive the goods and complete the trade cycle
- Sell the goods and collect revenue from customers
- Repay the finance facility once the revenue is received
The finance facility holds the cash in the gap. This is different from general working capital finance — which funds ongoing business operations rather than a specific purchase-to-sale cycle.
The main types of trade finance
- Letters of credit (LC). A bank guarantees payment to the seller on behalf of the buyer, subject to conditions (delivery documentation, quality certificates, etc.). Used widely in international trade to remove counterparty risk. The bank pays the seller; the buyer repays the bank.
- Invoice finance. A business sells its outstanding invoices to a lender at a discount, releasing cash before the customer pays. The lender collects the invoice payment when it falls due. Credicorp's Slice product is an invoice finance product.
- Supply chain finance (reverse factoring). A buyer arranges for its suppliers to be paid early by a lender, using the buyer's credit standing. The buyer repays the lender on a longer schedule. Used by large buyers to support smaller suppliers.
- Trade loans. Short-term loans specifically to fund a purchase of goods for resale. The loan is repaid when the goods are sold. Can be specific to a single shipment or available as a revolving facility.
- Working capital facilities. General short-term credit — bridging loans, revolving facilities — that can be used to fund trade purchases alongside other business costs. Credicorp's Business Bridging Loan and Flex facility fall into this category.
How to choose the right trade finance product
- Identify the specific need. Are you guaranteeing payment to a foreign supplier? A letter of credit. Releasing cash from unpaid invoices? Invoice finance. Funding stock purchases before customer payment? A trade loan or working capital facility. The specific problem drives the product choice.
- Map the cash flow gap. When do you pay? When do you receive goods? When do you sell? When does the customer pay? The gap between paying for goods and collecting revenue tells you how much finance you need and for how long.
- Match product duration to the gap. Short gaps under 84 days — common in domestic trade cycles — can be funded with a Credicorp Business Bridging Loan or Flex revolving facility. Longer or more complex gaps, or international trade transactions, may need specialist instruments from a trade finance bank or specialist provider.
- Apply at the right provider. For a short-term working capital gap driven by a trade cycle, apply at credicorp.co.uk. For a letter of credit, contact your business bank. For invoice finance, Credicorp's Slice or another invoice finance provider. For supply chain finance, the buyer initiates the programme. Match the channel to the product.
Trade finance questions
What is trade finance?
Trade finance is a broad term for financial products that facilitate international or domestic trade — specifically the purchase and sale of goods between businesses. The core problem it solves is the timing gap between when a buyer must pay for goods and when the buyer can resell those goods and recover the cash. Trade finance products bridge that gap: they allow the buyer to pay the supplier on time while the buyer waits for revenue from selling the goods on.
What are the main types of trade finance?
The main products are: (1) Letters of credit (LC) — a bank guarantees payment to the seller, subject to the buyer meeting specified conditions; used widely in international trade; (2) Invoice finance — selling outstanding invoices to a lender to release cash before the customer pays; (3) Supply chain finance (reverse factoring) — a buyer arranges early payment to suppliers via a lender, funded by the buyer's credit strength; (4) Trade loans — short-term loans specifically to fund the purchase of goods for resale; (5) Import/export finance — product-specific credit lines for importers or exporters.
Is trade finance the same as working capital finance?
They overlap but are not the same. Working capital finance is a broader category — it covers any short-term credit used to fund the day-to-day operations of a business, including payroll, rent, and overheads. Trade finance is more specific: it is used to fund the purchase, shipment, or sale of goods. A Credicorp Business Bridging Loan or Flex facility is working capital finance — it can be used for trade purposes but is not tied to a specific shipment or invoice in the way that a letter of credit or trade loan is.
Does Credicorp offer trade finance?
Credicorp's products — the Business Bridging Loan, Flex revolving facility, and Slice invoice finance — are short-term working capital products rather than specialist trade finance instruments. They are not letters of credit, supply chain finance programmes, or import/export credit lines. However, they can be used by a trading business to bridge a cash flow gap that arises from a trade cycle — for example, to fund stock purchases while waiting for customer payments. The right product depends on the specific need; read the bridge vs Flex vs Slice guide for a product comparison.
Where can a UK business get trade finance?
Trade finance is offered by: high street banks (Barclays, HSBC, NatWest all have trade finance desks); specialist trade finance lenders; export credit agencies (UK Export Finance for exporters); and invoice finance providers. The right provider depends on the product type needed — letters of credit typically require a bank relationship; invoice finance is available from many specialist lenders; trade loans are available from banks and specialist short-term lenders. A business finance broker can help identify the right match.
Related guides
For Credicorp's invoice finance product, read what is invoice finance. For the comparison between Bridge, Flex, and Slice, read Bridge vs Flex vs Slice. For how working capital finance works, read what is working capital finance. All the guides are on the Learn hub.
Short-term trade gap? Credicorp can bridge it.
Bridge up to 84 days. Flex for repeat drawing. Slice for single invoices. Same-day decision, no personal guarantee.