Trust Receipt Explained 2025: How It Works, Companies Involved & Pricing Insights

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What Is a Trust Receipt?

A trust receipt is a financial instrument where a bank releases merchandise to a buyer but retains legal ownership of the goods. This arrangement allows the buyer to hold and use the merchandise in trust for the bank, typically for manufacturing or resale purposes.

Key Insights

• Trust receipts allow banks to release goods to buyers while maintaining ownership rights.
• Commonly used by equipment dealers, automotive companies, and businesses handling high-value durable goods.
• The buyer holds the merchandise as trustee, responsible for selling or processing it on behalf of the bank.
• Often integrated within letter of credit financing, trust receipts act as promissory notes ensuring loan repayment upon sale.

How Trust Receipts Operate

Trust receipts facilitate short-term financing by enabling businesses to receive goods without immediate payment. This is crucial when cash flow is tied up in other operations. Typically, companies purchase inventory from suppliers or importers and may lack upfront funds to pay immediately.

In such cases, banks step in by providing financing through trust receipts. The bank pays the exporter or supplier, retaining ownership of the goods, while the buyer holds and sells them as trustee. The trust receipt serves as a legal promise to repay the loan amount after the goods are sold.

Although the bank holds a security interest, the buyer controls the goods and must keep them separate from other inventory. Ownership transfers to the buyer only after full repayment to the bank.

Practical Example of a Trust Receipt

Consider a business that finances merchandise entirely through a trust receipt, investing minimal personal capital. The bank assumes most credit risk, while the business manages sales and bears risks related to damage, loss, or depreciation. The borrower is also responsible for all associated costs like manufacturing, shipping, customs, and storage.

Important Considerations

Trust receipt financing requires a strong relationship between borrower and bank, with agreed terms covering loan amount, interest, and repayment maturity—usually 30 to 180 days. Failure to repay on time may lead the bank to repossess and sell the goods.

Trust Receipt Transactions Explained

When a company lacks the capital to buy merchandise outright, a trust receipt transaction allows a bank to finance the purchase while retaining ownership. The company agrees to repay the bank after selling the goods.

Trust Receipt vs. Letter of Credit

A letter of credit guarantees the seller will receive payment from the buyer’s bank, while a trust receipt involves the bank lending goods directly to the business but keeping ownership until payment is made. The business gains ownership only upon repayment.

Consequences of Violating a Trust Receipt

Violations occur if the borrower fails to return the goods or remit proceeds from their sale as required. This breach can result in legal and financial repercussions.

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