What is a trust receipt agreement?

Answer 1

A trust receipt is a form of inventory financing that is often used for goods that are easily identifiable, typically with a serial number. Automobiles, recreational vehicles, boats, trailers, TVs, and refrigerator/freezers are examples of products that have serial numbers. Keep in mind that the biggest question that must be answered in inventory financing agreements is, "Does this specific item serve as collateral for the loan or not?" If the company defaults on the loan, the bank (or finance company) must be able to clearly identify which items it is entitled to seize in the event of non-payment. There are various ways of identifying these items. # A blanket loan uses ALL of the inventory as collateral, so there is no question of which items are covered by the agreement. This is also known as a floating inventory lien. # A warehouse financing arrangement places a fence or boundary (typically in a warehouse) around the items to clearly identify the items serving as collateral. It is usually used for inventory items that are not easily distinguishable from one another, like furniture, lumber, carpeting, etc. # A trust receipt lists the serial numbers of the items, clearly identifying those that are covered by the loan agreement. Parts of A Trust ReceiptEssentially, a trust receipt is a combination of a promissory note (or IOU), a mortgage agreement (a document that lists certain items as collateral for the loan), and a list of restrictive clauses (both positive and negative). Promissory Note The promissory note is proof that a loan exists and lays out the repayment terms. It typically looks something like this: Mortgage AgreementThe second major part of the trust receipt is the mortgage agreement. The mortgage agreement identifies each item that serves as collateral for the loan. Notice that the inventory items have a "release price." When one of the items is sold, the borrower takes cash (from the sale) to the bank and pays off that portion of the loan. A line is then drawn through that item on the trust receipt and it is released from the agreement. (Additional items may be listed on continuation pages of the trust receipt.) Restrictive Clauses Terms of the agreement appear after the mortgage section. For example, Signature Section Then there is, of course, the signature section.