Trust receipt definition
/What is a Trust Receipt?
A trust receipt is a legal document, stating that a borrower of funds has physical possession of certain property that is held in trust for the lender. Under this arrangement, the lender retains title to the underlying assets until the borrower pays back a designated debt to the lender. Upon repayment of the loan, the borrower gains title to the underlying assets. If the borrower does not pay back the lender, then the trust receipt is considered to have been breached, and the lender can seize the associated property.
Trust receipt arrangements are classified as asset-based lending, since assets are being used as collateral on loans.
Characteristics of a Trust Receipt
The key characteristics of a trust receipt are as follows:
Security agreement. A trust receipt serves as a legal document that allows the borrower (importer) to take possession of goods while the lender (usually a bank) retains ownership until full payment is made.
Lender ownership of goods. The lender retains title to the goods or merchandise until the importer sells them or repays the loan.
Short-term financing tool. Trust receipts are used to facilitate short-term trade financing, allowing importers to take possession of goods without immediate full payment.
Obligation to sell or use for intended purpose. The importer (borrower) is required to sell the goods or use them for the specific business purpose agreed upon with the bank.
Conditional release of goods. The lender releases the goods to the importer under a trust arrangement, meaning the importer holds them in trust for the bank until payment is made.
Used in documentary credit transactions. A trust receipt is often used in conjunction with letters of credit, where the bank finances the importation of goods.
Risk mitigation for lenders. A trust receipt provides security to the lender, ensuring that it can reclaim goods if the borrower defaults.
Who Uses Trust Receipts?
Trust receipts are commonly used by distributors and dealers that sell expensive goods; they obtain the inventory under trust receipt arrangements with their lenders and then pay back the lenders as the inventory is sold.
Example of a Trust Receipt Arrangement
A car dealer borrows funds under a trust receipt arrangement in order to purchase automobiles from the manufacturer. Once the dealer sells a car and uses the funds to pay off the lender, the lender shifts title to the dealer, who in turn transfers title to the buyer of the vehicle.