Trust Receipt

What is a Trust Receipt?

Trust Receipt is short term finance in the nature of promissory note to the bank where the loan availed would be repaid on sale of goods (local or export) to the customer.

Explanation

Trust-Receipt

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Format of Trust Receipt

These are used throughout the world with no uniform format. In other words, this issued by a bank in the UK may not be the same as practiced in the USA.

The basic requirements are as follows:

  • Date of the Trust Receipt
  • Attachment of Sale order received
  • Nature of the goods purchased (PO attached if obtained)
  • Approvals obtained from the concerned authorities (If import)
  • The Bank account details of the foreign exporter
  • Other terms as required by the bank

How does Trust Receipt Work?

The process practically is quite complicated especially in case of import or export transactions as the provisions of the local customs act and the rules (if any) made thereunder are also to comply.

The basic process is as follows:

  • The customer approaches a bank for the want of trust receipt by filling the required forms and completing the necessary process.
  • The bank on being satisfied with the documentation appoints the customer as its agent to purchase the good required by him on behalf of the bank.
  • On receipt of goods, the bank pays the purchase consideration to the supplier of goods within the timelines agreed.
  • The Payment is made only to the bank account as mentioned in the trust receipt document.
  • The goods obtained are segregated and stored in the warehouse of the borrower until sold.
  • The Bank is intimated on a periodic basis about the closing balance of the good and its condition.
  • The purchase consideration realized when sold is first used to settle the trust receipt’s principal and interest.

How is Trade Receipt different from the Letter of Credit?

So the next question is, How is trade creditTrade CreditThe term "trade credit" refers to credit provided by a supplier to a buyer of goods or services. This makes it is possible to buy goods or services from a supplier on credit rather than paying cash up front.read more different from the letter of credit?

So, the first and initial step is to ensure that the borrower has the documents in place to avail the trust credit, therefore the basic prerequisites would be:

Also, the above are general and are common across countries. The banks based on local laws make seek for additional documents.

Advantages

#1 – Easy Source of Finance

Usually, banks do not hesitate to give trust credit. This is because it is certain that the money would be repaid with interest once the goods are sold. It is a win-win situation to both the bank and the borrower since the bank gets money in the form of interest and the company earns money without having to initially invest.

#2 – Instant Liquidity

The cash otherwise available can be used for other working capital and investment purpose. This enables the company for effective treasury management.

Disadvantages

#1 – Excessive Control

Banks lay a lot of conditions on the customer. Few conditions are:

  • To maintain the inventory pertaining to trust credit separately
  • Maintain and issue reports to the bank on a periodic basis.
  • The clause that “bank may conduct a stock audit if required”
  • Cost constraint

The company may incur additional costs in terms of interest and to comply with the banks’ other conditions. A cost-benefit analysisCost-benefit AnalysisCost-benefit analysis is the technique used by the companies to arrive at a critical decision after working out the potential returns of a particular action and considering its overall costs. Some of these models include Net Present Value, Benefit-Cost Ratio etc.read more of this extant is to be conducted.

#2 – Excessive Documentation

You do not get a trusted credit unless the minimum of the above documents is submitted. Practically it is not possible to get customs clearance for export of goods to the customer without actually manufacturing the good.

(Note: you first buy the good and then process for sales)

Conclusion

Hence, The cheapest source of finance with a comparably flexible maturity period is trust receipt. The source can be selected with requisite cost-benefit analysis and by submitting requisite documents.

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