Escrow: the little tool that can minimise the risk to your business

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  • Don’t walk away from business anywhere. You may well be leaving the future of your company behind - think again. Consider escrow as a way to do more business.

    Being in business is frequently challenging, sometimes worrying and always interesting. With Brexit looming, we can add another to that list - unpredictable.  With this new uncertainty business owners must step up their game in an effort to find new markets and suppliers - it’s the only way to answer the unanswerable question about the impending separation from the EU. Getting energized to seek new business relationships in new markets is often the first and biggest hurdle. However, waiting to see how the Brexit negotiations with Europe work out might be a catastrophic error for your business.

    When you’ve answered the ‘where to seek new customers’, ‘how to find them’ and ‘how to meet them’ questions, and you secure a new interested buyer for your product or service in a new market, you’ll face the question about agreement on payment for your service or product.  This is often where the burgeoning commercial relationship comes to a crashing end. You would like to (or must) be paid some or all of the money up front, but the buyer is not comfortable paying a new supplier or service provider before delivery, especially one from outside their jurisdiction.  

    So, barring a ‘letter of credit’ issued by a bank you know from a trusted jurisdiction, you or your new buyer are forced into some type of financial leap of faith: delivery before payment, or payment before delivery. We all know exactly how that feels; we’ve all done it. Fortunately, it usually works out. But when it doesn’t, it can have dire consequences. For this reason, too many transactions are left on the table and never closed.

    There is an option that all businesses should know about, especially those who seek to expand into unfamiliar markets: escrow. 

    What is escrow?  In this context, escrow is a process where a neutral third party (the escrow company) holds money for the buyer and seller in a transaction. The money comes from the buyer. When the seller delivers the service or product as agreed, the escrow company moves the money from escrow to the seller. If the seller does not perform by delivering the service or product as agreed by a certain date, the money held in escrow is returned to the buyer.  Escrows can be used in domestic or international transactions.

    Introducing this simple process can reduce the risk to both buyer and seller, because there are two important assurances in an escrow. The first is that the buyer has real money and that it is committed to the transaction. The second is that the buyer’s money is not in the hands of the seller before the product or service is delivered. 

    Escrows have been around for thousands of years. The earliest reference found in a quick Google search noted in ancient China more than a thousand years ago “ordered that the cattle be held in escrow”.

    The escrow company providing the escrow service must be neutral. That is to say, there should be no preference or obligation or agency duties by the escrow provider to one of the parties to the escrow over the other. If the escrow company gives advice to the Buyer or Seller about the transaction served by the escrow, they may not be neutral. If they have to give advice, they are not neutral. Both the buyer and seller must have complete confidence that the escrow provider is neutral at all times.

    How does the escrow company know when to move the money from the escrow account to the seller or back to the buyer? Every escrow has “escrow instructions”.  These instructions tell the escrow company the specific conditions that must be met to initiate movement of money from the escrow account.  The instructions are written by the escrow company, and contain the details of the escrow directly from the buyer and seller. The escrow instructions must be agreed to and signed by both the buyer and seller. 

    In brief, these instructions are the standing orders from the buyer and seller to the escrow company to hold a sum of money then move the money to the seller upon a certain event. If the event has not happened by a specific date, the money in escrow must be returned to the buyer.  

    Can an escrow be structured with multiple deposits into escrow and multiple disbursements from escrow? Yes - the structure of an escrow is very flexible.

    What business sectors can use escrow? Commercial transactions in all sectors.

    Currencies? Just about any currency can be used, but if you’re trading internationally, it’s likely you’re going to trade in sterling, euros or US dollars. 

    Escrows can be any size, but the cost of an escrow may make a smaller transaction cost prohibitive. Prima Escrow International fees are a percentage of its size - the larger the escrow, the lower the relative fee.

    How long can an escrow last? This is dictated by the buyer and the seller.

    What if there’s a dispute between the buyer and seller? Prima Escrow International has a structured mechanism that locks the process in the event of a formal dispute between the principals. The escrow company will not play a part in resolving the dispute. When the dispute is resolved, the escrow company will follow the amended instructions from the buyer and seller.

    In jurisdictions that have escrow as a common business tool, they are used millions of times a year, especially in banking, finance, construction, property transfer, and the aircraft trading service sector. This age-old process is one that might prove to be a very useful tool to businesses north and south looking to carve out their own soft Brexit, no matter what happens between London and Brussels.

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