What is an Escrow Account?
Escrow-based payments have been around the corner for quite some time. Escrow accounts, being the third party behave like a connecting link between two parties who are in the process of completing a transaction.
Escrow accounts hold money, assets, funds, titles, securities and other assets or anything of value. They hold these until the final amount is transferred to the beneficiary.
Why would a business need an Escrow account?
In any financial transaction, the seller has a concern regarding the assurance of receiving the payment. Similarly, the other party or the buyer’s concern regarding investment and receiving goods in a sound state as expected is genuine and legitimate. Here comes the role of a neutral third party that keeps the funds in an Escrow account as security. When the buyer and seller both meet the obligations of the transaction, the amount from the Escrow account is transferred to the actual recipient. The problem for both the buyer and seller is solved using this digital payments platform.
The buyer can place the funds in the escrow account which is supervised by a third party. The third party forwards the funds to the seller only after the conditions indicated in the financial agreement are met with. Therefore, an Escrow account is a powerful financial instrument in secured transactions wherever there is an atmosphere of risk or distrust between two parties.
Furthermore, the Escrow system follows a guided timeline where both parties can track the payment as well as the movement of the contract as decided.
The escrow system not only minimises frauds and scams in sectors of real estate, automobile, intellectual property and law. But is also emerging as a reliable system for startups and other businesses that are on the verge of high-risk bearing during various business stages such as procurement of raw material supplies, production within a stipulated time, supply chain, professional services, etc.
An example of how a business can benefit from an escrow account:
Consider a situation: A company has received a purchase order for producing a huge quantity of finished goods. Consider the lead time to be nearly 9-12 months long.
There are two challenges in front of the supplier or the manufacturer in this case. The first is the procurement of raw materials for production on a large scale. The existing inventory may not be sufficient. And the second is an assurance that the supplier will get the payment after the order is completed. After all, the company will invest its operational costs and production facility for an order for such a long period. They may ask for a deposit, part-payment or full for initiating the production.
On the other hand, the buyer may not want to pay the full amount in advance. There is a risk of paying for products that may not arrive on time. Or in another scenario, it may fail to meet the product specifications.
Now, holding the funds in an escrow account can be very assuring for both parties. Another support to the manufacturer can be from a third-party lender offering customised business loans in the form of purchase order financing. Lenders such as Oxyzo Financial Services Pvt. Ltd. offer working capital loans, bill discounting, purchase order financing and several other financial services to help startups and existing businesses.
Even in this scenario, the manufacturer can avail of purchase order financing for the procurement of raw materials. He may even get a good credit line as per the customer’s needs. Even in case of a helping hand in the operational costs while the order is under process, the business can apply for a quick working capital loan, also available with Oxyzo.
Also Read:- What Is A Mortgage Loan, Its Process And Other Benefits?
This was one scenario. But the same can be applied to a plethora of business transactions and that too in diverse sectors. An escrow account is an assurance for two different parties that the participants will act as expected. Transactions of real estate, property mortgage, and automobile sector can take a long time before the deal finally matures. And an escrow account can be of real big help in such long-term as well as risky transactions.
