Insurance · 7 June 2017

What are warehouse receipts and why are they important?

Warehouse receipts are proof-of-ownership documents used by warehouse operators

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 aren’t used at all in trade deals.

Principally, if stored products become damaged or are tampered with in any way, the operator of the warehouse or facility where the products are being held is liable to pay damages to the contracted owners, along with any other party who loses out financially.

Here’s another example, of what can happen without warehouse receipts. Let’s say Jane Jones runs a logistics business, operating a number of warehouses across the South East of England. One of her clients is a London-based independent bicycle manufacturer, importing steel frames from Europe which Jones receives, stores and delivers.

One day, she receives a shipment of imported steel bike frames and immediately moves them to one of her warehouses – there are far too many frames to check the specification on each one.

According to the terms of a contract between Jones and her client, the frames are delivered a few days later. However, once delivered, some of the frames turn out to be rusty, and the client is unable to use them.

Without a warehouse receipt proving the steel frames were of a certain quality and specification when Jones received them, there is nothing to prove the frames didn’t rust whilst Jones was storing them, and no evidence proving her client has in fact always been legal owner of the frames.

As a result, Jones is likely to be liable to pay for the cost of the damaged frames to her client, as she cannot legally prove the goods weren’t hers and were not damaged in her possession.

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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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