A trust receipt is a declaration of issuing goods from a bank to a buyer, with whom the bank holds the ownership power to the issued property. In an order including a trust receipt, the bank persists the owner of the goods, however the buyer provides a permit to hold the goods in trust for the bank for manufacturing or selling.
How Trust Receipt Work
A trust receipt is a commercial document involving a bank and a company with the transfer of assets but cannot pay for the purchase after the inventory has been sold. In many cases, company flow and working capital can be tied to the other projects and business processes.
In the normal course of conducting a business, companies buy assets for their records from wholesalers or vendors, resell or manufacture goods to consumers. These goods can either be bought regionally or imported from other companies. When the companies get goods, they are billed by the seller for the purchase of goods. In case that the company doesn’t have the necessary cash on hand to rectify the bill, it can get financing from the bank through a trust receipt.
The trust receipt works as a promise note for the bank that the loan amount will be repaid on the sale of the goods. The bank makes payment to the exporter on its end or guarantees payment to the seller for the goods. The lender, but, holds the claim to the goods as protection. The clients or borrower must hold the assets separate from their other inventory and, effectively, hold and sell the goods as trustees to the bank.
However the bank has a protection interest in the assets under the usual conditions of a trust receipt, the client takes ownership of the assets and can do so as long as he doesn’t violate the conditions of his agreement with the bank. If he determines to stop the bank’s safety interest and join it to the inventory, he can tender an advanced amount on the assets, which will give him complete ownership of the assets.
Advantages of Trust Receipt
- Easy Source of Finance: – Usually, bank trust does not hesitate to provide credit. This is because it’s some that money will be paid with interest after the goods are sold. This is a win-win situation for the bank and the borrower as the bank receives money in the form of interest, and the company earns money without initially investing.
- Instant Liquidity: – Otherwise, the available case can be used for other working assets and purposes of investment. This makes the company capable of having effective treasury management.
Basic Requirements of Trust Receipt
- Date of Trust Receipt
- Attachment of sale order obtained
- Nature of assets purchased
- Permissions received from the concerned officials
- The bank account information of the international exporter
- Other terms as demanded by the bank
How Is Trust Receipt Different From the Letter of Credit
- The local banker gives a letter of credit to the international party for payment of the consideration of the transaction. In the case of a trust receipt, it isn’t an instrument under which the bank pays and then received from the borrower. The parties cannot know each other in an international transaction.
- In these cases, the international seller is not secured from the uncertainty of default of his foreign client. The seller, therefore, wants the buyer to provide him an assurance from his banker, asserting that the bank will be responsible to pay its consideration if the client defaults. For this persistence, the bank guarantees a commission from the client and does not charge interest in trust receipt.
- In other words, in business credit, the bank works as the head, and the borrower is its agent. On the other hand in the Letter of credit, the bank only guarantees payment to the international seller and is only responsible if the regional client defaults. Therefore, the bank has the first charge in the case of a Letter of credit however the second charge in trust receipt.
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