A trust receipt is a written legal document between a bank and a person borrowing from that bank. It states that the bank will give merchandise to the borrower but the bank will still retain the title to the merchandise and can repossess it if the buyer does not uphold the terms decided upon in the trust receipt. The borrower must keep the merchandise and any profits made from that merchandise separate from normal business expenses and if the bank repossesses the items, the borrower will return the items or the money made from selling the merchandise.
Typically, items used in trust receipts are large items with serial numbers that are easy to record and keep track of. For example, automobiles, TVs, large appliances, and trailers can all be given to a borrower by signing a trust receipt. The borrower then promises to pay the loaner back an amount of money worth the property loaned to him.
The trust receipt concept is similar to a loan where the borrower provides a type of collateral to the bank or other business loaning him the money. This type of loan is considered a secure loan because an item, known as the collateral, is listed as part of the arrangement. If the borrower does not repay the loan, the lender has the right to take the collateral item and sell it to cover the money the borrower owed him. Collateral includes items such as houses, cars, or any other expensive items. The difference between a trust receipt and a standard loan is that in a trust receipt the items being borrowed, and any money made from selling them, also serve as the collateral for the loan.
Three parts make up the actual trust receipt. The first part simply states that the borrower owes a specific amount to the lender, that the lender is giving a specific amount to the borrower, and that the borrower promises to pay the lender back or allow it to collect on the items he put up for collateral. The second part lists all the items the lender gave the borrower and includes serial numbers and other information to allow the lender to repossess the items if the borrower does not pay back the money owed. Finally, the last part lists all the terms and conditions that apply to the agreement. After each party reviews the document, they sign it and it goes into effect.