What are warehouse receipts and why are they important?
To help first-time exporters and importers understand commonly-used terms they may have only just come across, Business Advice identifies what warehouse receipts are, and why it’s important for company owners to get to grips with them.
Simply put, a warehouse receipt is a document which proves ownership of a given commodity that is stored in a recognised location, like a warehouse or a vault.
Whether it’s for bars of steel, sacks of grain or crates of strawberries, warehouse receipts are used as proof to show which party owns a given commodity at the time it is deposited, alongside specific details of the products being stored.
Primarily a proof-of-ownership document, a warehouse receipt is also used by warehouse operators themselves, as evidence that a commodity of a specified quantity and quality has been secured and is being safeguarded at their premises, ahead of a pre-arranged shipment or delivery date.
Warehouse receipts may either be negotiable or non-negotiable. It is more common for warehouse receipts to be issued in negotiable form, allowing for the transfer of ownership of the commodity in question without actually having to deliver the goods physically.
As a consequence, negotiable warehouse receipts can be used as collateral for loans and other forms of trade finance. Non-negotiable warehouse receipts, on the other hand, allow delivery of commodities only to one pre-approved party, and must therefore be endorsed by that party upon transfer of the goods.
How warehouse receipts work
Here’s an example. Let’s say John Smith has approached a small coffee producer and bought a shipment of coffee. The coffee hasn’t been produced yet, but Smith has signed a contract with the producer, and agreed a price for the future delivery of coffee in a given quantity.
When his contract with the producer expires, Smith becomes the owner of his coffee. But, rather than have truckloads of coffee delivered to his front door, Smith instead receives a warehouse receipt, with details of where the coffee is being stored in the quantity specified. Smith can then choose to sell his coffee, using his warehouse receipt as proof that the stored coffee is his.
Why are warehouse receipts important?
Warehouse receipts benefit exporters and importers, because goods never have to be physically moved from one location to another to prove their existence. Rather, the warehouse receipt means ownership of the goods simply changes hands.
In addition, warehouse receipt financing is an increasingly popular financing method, by which funds are extended to suppliers or producers on the basis of products and commodities that have been held in storage as collateral.
Warehouse receipt financing is especially useful for smaller traders who deal with large quantities of agricultural products and food, for example, who might otherwise struggle to access finance.
These small traders, often operating in emerging markets in Asia, Africa or South America, may be turned down whilst trying to borrow from banks in their country because they don’t have enough collateral.
Problems can arise if key information is left off of warehouse receipts, or if warehouse receipts arent used at all in trade deals.
Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.
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