Factoring Companies Guidebook
Trust Receipts
Definition
This is a document enabling title to goods to be retained despite relinquishing physical possession of them and will therefore generally extend to the proceeds of sale of the goods. They are commonly used to retain title under Letters of Credit upon release of documents and thereby the goods, also under 'Stock Confirming' Agreements, whereby the finished goods are financed by a third party.
See also: - "Letters of Credit"
Concerns
The right to the proceeds of the sales of goods released under a Trust Receipt would rest in the holder of that document, irrespective of any Factoring or Discounting Agreement.
Identification
Identify purchases made under Letter of Credit and determine whether Trust Receipts are a feature.
Make enquiries as to whether the Client's stock is financed or paid for by anyone other than the Client.
Review the cashbook for evidence of receipts from Stock Finance Houses and through purchase invoices for stock purchases. Such arrangements generally occur in distribution type businesses.
Treatment
Where Trust Receipts are in place the associated debts must be reserved for in full. If the Client wishes to continue financing all of its stock through other parties, it is unlikely that a Factoring or Discounting Agreement could be maintained.
Businesses where Trust Receipts are known to occur:-
- Drug Wholesalers
- Jewellery Wholesalers.