Trust Receipts

What is a trust receipt?

A trust receipt is a short-term financing arrangement where a bank pays for goods (often to an exporter or supplier) but retains legal title to those goods while allowing the buyer to take possession. The buyer holds the merchandise “in trust” for the bank, uses it for resale or manufacturing, and agrees to repay the bank when the goods are sold or by an agreed maturity date.

Key takeaways

• Enables companies with limited cash to take possession of inventory before paying for it.
• Bank retains ownership (security interest) until the loan is repaid.
• Buyer keeps profits from resale but is responsible for all expenses and loss or damage to the goods.
• Typical loan terms are short—commonly 30 to 180 days—with agreed interest and repayment conditions.
• If the borrower defaults, the bank can repossess and dispose of the merchandise.

How trust receipts work

1. Buyer arranges financing with a bank to pay the supplier or secures a letter of credit.
2. Bank pays the supplier (or guarantees payment) and takes title to the goods.
3. Goods are released to the buyer under a trust receipt agreement.
4. Buyer sells or uses the goods and remits proceeds to the bank or repays the loan at maturity.
5. Once the loan is repaid, the bank’s security interest is released and full ownership passes to the buyer.

Rights and responsibilities

• Bank:
• Retains title to the goods as security.
• Bears credit risk if the buyer cannot repay.
• May repossess goods on default.
• Buyer:
• Possesses and may sell or use the goods within contract terms.
• Bears all operating costs (manufacturing, freight, duties, storage).
• Bears loss or damage risk and must still repay the loan if goods are lost.
• Must meet the agreed maturity date and interest terms.

Typical uses

• Importers bringing in inventory without immediate cash.
• Manufacturers needing raw materials to produce goods before sales revenue arrives.
• Traders and wholesalers managing short-term working capital gaps.

Trust receipt vs. letter of credit

• Letter of credit: Bank guarantees payment to the seller on behalf of the buyer; title transfer depends on the commercial agreement between buyer and seller.
• Trust receipt: Bank finances or pays for the goods and retains legal title while releasing physical possession to the buyer, who holds the goods in trust until repayment.

Violations and remedies

Violations include failure to remit sale proceeds or refusal to return goods as required. Remedies typically allow the bank to:
* Repossess and sell the merchandise.
* Pursue repayment or other contractual remedies for breach.

Example (concise)

A retailer imports $50,000 of apparel but lacks cash to pay the exporter. The bank pays the exporter and issues a trust receipt; title remains with the bank. The retailer sells the apparel within 60 days and uses proceeds to repay the bank plus interest. If the apparel is damaged in storage before sale, the retailer still must repay the bank under the trust receipt terms.

Bottom line

Trust receipts are useful short-term financing tools for businesses needing immediate possession of inventory without upfront payment. They require strong bank-borrower relationships and clear contract terms because the buyer assumes operational and loss risks while the bank retains legal ownership until repayment.