Trust Receipts
Candlefocus EditorFor a trust receipt, the trustor (the bank) transfers goods to the trustee on the condition that the trustee (the business) will sell the goods and deposit the proceeds in the trustor's bank account as collateral for a loan. If the trustee does not sell the goods, but instead uses them for other purposes, the bank will retain ownership of goods and may remove the goods from the possession of the business at any time.
The trust receipt is designed to allow the bank to obtain a secured interest in goods that are the subject of a sale, even though the bank does not obtain title to those goods. All goods purchased with the trust receipt loan funds remain the assets of the bank and are subject to return in the event the business fails to repay the loan.
The trust receipt agreement requires the business to pay back the loan according to the terms specified in the loan document. The trust receipt also requires the business to give the bank a copy of all orders, invoices, and sales receipts, and provide the bank with information on all transfers or dispositions of the goods that are purchased with the loan money.
In the event the loan is not repaid according to the terms of the trust receipt agreement, the bank can take possession of the goods, stop payment of the invoice, demand payment in full, and take legal action to recover the debt.
Trust receipts are an important tool for banks, as they provide security and allow banks to provide financing to businesses that may not qualify for traditional bank loans. Additionally, trust receipts make it easier for businesses to obtain goods from suppliers and retailers and puts banks in a stronger position in the event that the loan becomes delinquent.