Trust Receipt

REVIEWED BY ADAM BARONE

Updated Apr 12, 2019

What Is Trust Receipt?
A trust receipt is a notice of the release of merchandise to a buyer from a bank, with the bank
retaining the ownership title of the released assets. In an arrangement involving a trust receipt,
the bank remains the owner of the merchandise, but the buyer is allowed to hold the merchandise
in trust for the bank, for manufacturing or sales purposes.

How Trust Receipt Works

A trust receipt is a financial document attended to by a bank and a business who 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 he wants with them as long as he
does not violate the terms of his contract with the bank. If he decides to terminate the bank’s
security interest and tie to the inventory, he may tender the amount advanced on the goods,
giving him total ownership of the goods.

Special Considerations
Extending 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.

Under 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.

Key Takeaways

 A trust receipt is a notice of the release of merchandise to a buyer from a bank, with the
bank retaining the ownership title of the released assets.

 In an arrangement involving a trust receipt, the bank remains the owner of the
merchandise, but the buyer is allowed to hold the merchandise in trust for the bank, for
manufacturing or sales purposes.

 The trust receipt serves as a promissory note to the bank that the loan amount will be
repaid upon sale of the goods.

Related Terms

What Is a Purchase Money Security Interest (PMSI)?

A purchase money security interest (PMSI) is a legal first claim to repossess
property financed with its loan when a borrower defaults.
more
Working Capital Loan – Definition
A working capital loan is one taken to finance the everyday operations of a
company. Organizations in industries that have high seasonality or cyclical sales
cycles often rely on this type of loan to help tide them over during periods of
reduced business activity.
more
Unsecured Loan
An unsecured loan is a loan that is issued and supported only by the borrower's
creditworthiness, rather than by a type of collateral, such as property or other
assets. Credit cards, student loans, and personal loans are all examples of
unsecured loans.
more
Everything You Need to Know About Lender
A lender is an individual, a public or private group, or a financial institution that
makes funds available to another with the expectation that the funds will be
repaid. Repayment will include the payment of any interest or fees.
more
Selling out of Trust
A selling out of trust is the illegal practice of diverting the proceeds from a sale,
which should go to a lender, to some other use.
more
A Guarantor Agrees to Pay a Borrower's Debt in the Event of Default.
A guarantor is a person who guarantees to pay a borrower's debt if they default
on a loan obligation. A guarantor is also someone that certifies to the true
likeness of an individual applying for a product or service.
more
Partner Links