A Trust Receipt is referred to as a notice of release of merchandise to a specific buyer from the bank. In the case of Trust Receipts, the bank retains the rightful ownership title of the released assets.
In the case of an arrangement where a trust receipt is involved, it can be seen that the bank retains ownership of the merchandise.
However, the buyer is allowed to hold merchandise in trust, on behalf of the bank. The rationale behind this can be manufacturing, or for purposes of resale.
Therefore, it can be seen that the Trust Receipt tends to serve as a promissory note to the bank about the amount that is going to be repaid upon the sale of goods.
How Do Trust Receipts Work?
Trust receipt can simply be referred to as a financial document that is attended to by a bank that has managed to receive the delivery of goods.
However, they are unable to pay for those goods till the point where inventory is sold.
During the normal course of operations within a company, it can be seen that the company’s cash flow and working capital tend to be tied up in various different projects or arrangements because of which the company is unable to pay for this merchandise upfront.
During the course of the business, there are numerous different transactions that take place, and a company frequently needs to change its suppliers.
In the cases where the company is relatively new or has not been around for a considerable amount of time, suppliers might be reluctant to provide the goods and services in an upfront manner.
Therefore, they can use trust receipts from the bank in order to guarantee that the suppliers will eventually pay them back after the goods have been sold, or payment has subsequently been made.
Therefore, Trust Receipt can help companies to carry out their normal processes, based on a guarantee or a promissory note by the bank.
In this regard, the bank tends to present a letter that guarantees that the payment will eventually be released by the company against the merchandise that has been sold.
However, in addition to the guarantee, the lender also holds the legal right to the particular merchandise or inventory as security.
In this regard, the customer or the borrower is also supposed to keep other inventory separate from these particular goods.
Typically in cases of Trust Receipts, it can be seen that the bank has a security interest, and therefore, the user of the merchandise is supposed to abide by the given terms and conditions.
As a matter of fact, a couple of aspects need to be accounted for in order to get a holistic idea about the functionality, and overall viability of trust receipts.
It involves a consensus between the bank and the customer on certain parameters including maturity date, interest charge, as well as financing amount.
Speaking of maturity dates under trust receipts, it can be seen that they are short-term and range from a timeline of 30 to 180 days.
During the time of maturity, it can be seen that the customer is supposed to repay the loan to the lender agreed upon in the terms of the trust receipt.
Once the maturity term ends, the bank must be repaid in full. Alternatively, it is supposed to be repaid if the sale transaction takes place earlier than that.
In a situation where the borrower does not honor the debt, then it will eventually result in banks taking over the asset, and then using it as per their will.
Factually, it should also be duly noted that in cases of trust receipt, the business does not have any inherent risk on its behalf.
The entire credit risk is solely handled by the bank itself. Similarly, it can also be seen that the business is supposed to bear and pay all added expenses that are incurred on the inventory.
They are not supposed to be dealt with by the bank.
Therefore, it can be seen that the Trust Receipt is a document that is presented to the supplier as surety that the payment would eventually be made after the goods have been manufactured, or sold.
In this case, it is becoming essential to ensure that there is proper clarity regarding the role of the bank, and how it can facilitate such a transaction at a minimized risk.