Advantages/ Importance of LTR:
A trust
receipt
is typically used when a bank has lent money for, say, import of
goods, but the goods have to be released to the
importer so they can be sold or
prepared for sale.
But until the loan has been repaid, the goods still belong to the bank. The trust receipt evidences the bank's ownership of the goods. The borrower agrees to put the
goods at the disposal of the
bank if required to do so, to keep them separate
from other goods etc.
so
they can be identified.
Trust receipts
normally have a time limit associated with them. This is the time by
which
the borrower's
business cycle
can be expected to have generated the money
to
repay the loan.
It has to be said that the security provided by a trust receipt is rather poor. As its name suggests, the borrower is trusted not to violate the terms of the agreement.
There are frequent cases of banks finding that they can't actually recover their
collateral.
Disadvantages of LTR:
One disadvantage of trust receipt financing is the requirement that a trust receipt
be
issued for specific goods. For example, if the security
is autos in a dealer’s
inventory, the trust receipts must indicate the cars by registration number. In order
to validate its trust receipts, the lending institution
must send someone
to
the borrower’s premises periodically to see that the auto numbers are correctly listed
because
auto dealers who are in financial difficulty have been known to sell cars backing trust receipts
and
then use the funds obtained for other operations rather than to repay the bank. Problems are compounded if the borrower has a number of
different locations, especially if they are separated geographically from the lender.
To
offset these inconveniences, warehousing has come into wide use as a method of
securing loans with inventory.