Trust Deed

A trust deed is a kind of how-to “build-it-kit”, which instead of describing the construction of a balsa wood airplane, describes how assets should be owned, managed, and eventually disposed of to the trustees, or beneficiaries who were involved in the model airplane build from the beginning.

A trust deed lays out the rights and obligations of the bank underwriting the purchase of whatever inventory is involved. It lays out the rights of the people transacting, and it spells out who gets called if and or when there is a conflict. And this is particularly useful in a world where there is, indeed…not a lot of trust.

Essentially, a business owner is just holding merchandise that was bought by the bank like: 18 miles of denim with intentional rips and tears in it, as the business owner stitches together hundreds, then thousands of sets of jeans. They sell into the fashion marketplaces in New York and Milan.

The bank owns that merchandise (i.e., they have a deed to it) until the business owner essentially buys them out of it, or pays back the loan amount committed when the merch was initially bought.

The trust deed is just the legal documentation that outlines the various obligations of both parties. Think of it as a contract...light.

Why would you want one of these arrangements if you're a business owner? Well, if you didn't have to have one because you couldn't afford the merchandise, you wouldn’t. But if you’re a fledgling company hoping to make it big in the big city, then well, you do what you have to do.

And you can imagine that banks charge high interest for setting up these trust deeds, because the credit risks here are usually reasonably high like the Levi’s stitching company just vanishes one night, or was, in fact, a meth lab using the denim as a filtration process and the Mexican mafia comes in one night, ending this little company’s entrepreneurial activities.

Another reason banks charge high interest is because the last thing they want to have to do is repossess denim, and then try to get their money back by selling 18 miles of it on eBay. So as a result, not only do trust deed borrowers pay high interest, but they also have to carry relatively expensive insurance so that, at the end of the day, the bank isn’t left high and dry.

Or at least, uh…just dry.