how trust receipts work
a trust receipt is a financial document attended to by a bank and a business that has received delivery of goods but cannot pay for the purchase until after the inventory is sold in most cases the company s cash flow and working capital may be tied up in other projects and business operations in the normal course of running a trade business companies purchase goods for their inventories from vendors or wholesalers to resell to consumers or to manufacture goods these goods may either be purchased locally or imported from other companies when these companies receive the merchandise they are also billed by the seller or exporter for the goods purchased in the event that the firm does not have the required cash on hand to settle the bill it may obtain financing from a bank via a trust receipt the trust receipt serves as a promissory note to the bank that the loan amount will be repaid upon sale of the goods the bank pays the exporter on its end or issues the seller or seller s bank a letter of credit guaranteeing payment for the merchandise the lender however retains the title to the merchandise as security the customer or borrower is required to keep the goods separate from its other inventory and in effect holds and sells the goods as a trustee for the bank although the bank has a security interest in the goods under the standard terms of a trust receipt the customer takes possession of the goods and may do what they want with them as long as they do not violate the terms of their contract with the bank if the customer decides to terminate the bank s security interest and tie it to the inventory they may tender the amount advanced on the goods gaining total ownership of the goods example of a trust receiptunder a typical trust receipt transaction the business has little to none of its own assets invested in the particular goods financed the bank bears the majority of the credit risk prevalent in the transaction the business keeps any profits made from the resale of the goods but also bears the business risk if the goods get damaged lost or deteriorate in quality or value the loss is solely the burden of the business and it remains liable for repaying the full loan amount to the bank in addition any business expense such as manufacturing costs freight custom dues storage etc is the responsibility of the business not the lending institution special considerationsextending short term financing through a trust receipt requires the customer or borrower to be in good standing with the bank the bank and the customer also have to agree to the terms of the trust receipt including such conditions as the maturity date interest charge and financing amount maturity dates under trust receipts are short term and range from 30 to 180 days at the time of maturity the customer must repay the loan to the lender with interest stipulated under the terms of the trust receipt the bank must be repaid at the time of maturity or after the sale of the goods whichever comes earlier if after the maturity date no payment has been received by the bank or the business defaults in paying its advances the bank could repossess and dispose of the merchandise 