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Why should manufacturers take a fresh look at traditional trade instruments?
Considering their reliance on international trade, UK manufacturing firms are significantly exposed to the global volatility that has so far defined 2025. With further disruption likely, how can trading firms reduce risk – and why might it be beneficial to take a fresh look at more traditional trade instruments?
Read time: 6 mins Added: 26/08/25
A manufacturing maelstrom?
A recent edition of the Lloyds Business Barometer found that this year’s geopolitical shifts – and their implications for supply chains – are of great concern to manufacturers in the UK. 35% of businesses in the UK manufacturing sector expect a negative impact on their US sales, and 51% said that they now need enhanced working capital support, especially through trade loans and receivables financing. Similarly, a recent survey conducted by Make UK found that 60% of its members believe that US tariffs are likely to harm them.
We’re already seeing that US policy shifts are starting to impact productivity in the manufacturing sector. According to the Lloyds UK Sector Tracker, manufacturing output declined for the seventh month in a row in May 2025 as factories continued to report softening demand. Six out of seven manufacturing sub-sectors recorded lower production, with five recording more significant falls in output.
Considering the challenges facing the sector, manufacturers could benefit from mapping their reliance on the US as a market and taking steps to address their risk exposure. This could range from diversifying their supply chain or export markets, to onshoring or nearshoring their means of production.
Crucially, they could also benefit from not only looking at who they trade with, but also how they trade – especially in terms of mitigating risk.
Traditional trade in turbulent times
The use of Open Account trade solutions such as Supply Chain Finance and Receivables Purchase have become a convenient and cost-effective way to trade, eliminating a considerable amount of documentation and offering cash flow advantages. But while Open Account solutions offer flexibility and could help win clients in competitive markets, some firms are looking for additional finance tools that mitigate the risk of disruption and offer an extra layer of protection.
As a result, we are seeing many manufacturers couple financing with traditional trade instruments – namely bonds, indemnities, guarantees, and letters of credit – which offer enhanced payment security and stringent risk mitigation measures. The recent Lloyds Business Barometer found that 24% of respondents want better access to letters of credit and guarantees. This indicates a growing focus on managing trade and counterparty risk against a backdrop of uncertainty and volatility, and an increasing appetite for using additional trade mechanisms to help with this.
Shirish Garg Director – Transaction Banking Sales at LloydsIt’s of paramount importance that manufacturing firms are able to protect their transactions to ensure the smooth flow of trade activity. With built-in risk mitigation measures, instruments like bonds, guarantees and letters of credit can enable smooth sailing internationally.
A closer look
How do bonds, indemnities, guarantees, and letters of credit work to help provide a layer of risk reduction? Here’s what you need to know:
- Bonds and guarantees can help manufacturers protect their business against loss in uncertain conditions by supporting their ability to perform under a contract or meet payment obligations. They can be used to help secure major contracts by underpinning any bid to win new business, indicating to the counterparty that the related activity is secure and low risk.
- Letters of credit allow importers and exporters to deal in confidence with one another, knowing that payment will be made if the transaction is carried out in line with the terms it specifies. They offer even greater risk protection by carrying the undertaking of the issuing bank – or both banks – in case of a confirmation, eliminating country or cross border risk, counterparty risk and bank risk.
- Indemnities are agreements through which one party commits to compensating another for loss or damages that may arise due to performance issues. They could also even enable corporates to be able to comfortably bid for larger projects with another layer of protection offered by banks.
Building trust in new markets
According to the Lloyds Business Barometer, 23% of businesses in the UK are looking to expand into new export markets in order to reduce their reliance on the US. But this also presents a new set of risks – especially when entering emerging markets instead.
Instruments such as letters of credit and guarantees protect manufacturers when working with counterparties in emerging markets. They offer security against risks such as government intervention, currency inconvertibility, or unexpected regulatory changes. It is even the case that in some jurisdictions, the use of letters of credit or guarantees is a legal requirement for cross-border trade.
Business practices in new markets may also differ considerably from those in the UK, and it may be necessary to build trust with new clients and suppliers when securing new contracts. Traditional trade instruments can help with this process. They can act as a neutral guarantee between parties that indicate to buyers that their funds are secure, and to sellers that payment will be made.
Increasingly, we are observing the opportunities for private sector commercial banks to partner with public sector or government agencies to provide additional capacity to the market. This becomes extremely beneficial for sectors such as manufacturing and exports, both of which are a priority for the UK government. We have already seen great success in this space for our clients that are active in key areas such as the energy transition.
Forecasting amid fluctuations
Financial planning can be notoriously tough during periods of economic instability, as this year has already proved. Using traditional trade instruments adds an additional element of predictability to cash flow planning, allowing manufacturers to forecast revenue and expenditure with more certainty.
The reduced risk also means that sellers may not require large advance payments, which allows buyers to manage their working capital more efficiently.
“The UK manufacturing sector is arguably the backbone of the country’s economy, accounting for 8.7% of total economic output and 7.9% of employment,” said Shirish Garg, Director – Transaction Banking Sales at Lloyds. “It’s therefore of paramount importance that firms are able to protect their transactions to ensure the smooth flow of trade activity. With built-in risk mitigation measures, instruments like bonds, guarantees and letters of credit can enable smooth sailing internationally.”
By using these trade instruments to reduce risk from a trade transaction, manufacturers can make the most of the opportunity to diversify their supply chain and export markets. They can explore new trade relationships and make sure that their logistical approach is the most effective in terms of cost and efficiency.
Helping Britain trade
When polled, 36% of businesses mentioned that they are interested in receiving more strategic insights, trade expertise and market guidance. As a relationship-led bank with an in-depth knowledge of the UK manufacturing sector, Lloyds can offer this to our clients. We work collaboratively with our clients to use the most suitable trade solutions – both traditional and modern, to complete trade transactions smoothly and with limited risk.
The manufacturing sector may be bracing for further volatility, but our trade solutions can help to protect against disruption. By considering bonds, indemnities, guarantees, and letters of credit, manufacturers can lay the foundations of successful trading relationships.
To find out more about how our international trade support can help firms in the manufacturing sector, contact Shirish Garg or speak to your Relationship Manager.