Trust receipt definition
/What is a Trust Receipt?
A trust receipt is a legal document, stating that a borrower of funds has physical possession of certain property that is held in trust for the lender. Under this arrangement, the lender retains title to the underlying assets until the borrower pays back a designated debt to the lender. Upon repayment of the loan, the borrower gains title to the underlying assets. If the borrower does not pay back the lender, then the trust receipt is considered to have been breached, and the lender can seize the associated property.
Trust receipt arrangements are classified as asset-based lending, since assets are being used as collateral on loans.
Who Uses Trust Receipts?
Trust receipts are commonly used by distributors and dealers that sell expensive goods; they obtain the inventory under trust receipt arrangements with their lenders and then pay back the lenders as the inventory is sold.
Example of a Trust Receipt Arrangement
A car dealer borrows funds under a trust receipt arrangement in order to purchase automobiles from the manufacturer. Once the dealer sells a car and uses the funds to pay off the lender, the lender shifts title to the dealer, who in turn transfers title to the buyer of the vehicle.