Legal Definitions - trust ownership

A trust receipt is a financing arrangement, commonly used in wholesale trade, where a lender (such as a bank) provides funds for a buyer (like a retail dealer) to acquire goods from a supplier. Under this arrangement, the lender retains legal ownership or a strong security interest in the goods, while the buyer takes physical possession of them. The buyer holds these goods 'in trust' for the lender, with the understanding that they will sell the goods and use the proceeds to repay the lender. This method allows businesses to stock inventory without immediately paying the full cost, while assuring the lender that their investment is protected by the goods themselves.

• Car Dealership Inventory: Imagine a new car dealership that wants to display a wide range of vehicles on its lot. Instead of paying the manufacturer for every car upfront, the dealership might enter into a trust receipt agreement with a bank. The bank pays the manufacturer for the cars, and in return, the bank holds the legal title or a security interest in those vehicles. The dealership then takes possession of the cars, displays them, and sells them to customers. As each car is sold, the dealership uses a portion of the sale proceeds to repay the bank for that specific vehicle. This allows the dealership to maintain a diverse inventory without tying up all its capital.

• Electronics Retailer Stocking New Models: An electronics store preparing for the holiday shopping season needs to stock hundreds of the latest televisions, laptops, and gaming consoles. To manage cash flow, the store might use a trust receipt arrangement with a financing company. The financing company provides the funds to purchase the inventory from the manufacturers, holding a security interest in all the electronics. The store receives the goods, places them on shelves, and sells them to consumers. For every item sold, the store remits a payment to the financing company, gradually clearing its obligation as the inventory moves.

• Appliance Store Floor Models: A small appliance store wants to update its showroom with new refrigerators, washing machines, and ovens. The store secures a loan from its local bank, structured as a trust receipt. The bank pays the appliance distributor, and the bank holds a lien or security interest on the new appliances. The store takes delivery, sets up the appliances as floor models, and sells them to customers. As each appliance is sold, the store uses the sales revenue to pay back the bank for that particular item, allowing the store to showcase new products without a large initial capital outlay.