Escrow
A financial arrangement whereby a third party holds a financial instrument or asset on behalf of two other parties that are completing a transaction.
The principle of an escrow arrangement is that a third party – someone who is neither the buyer nor seller – holds something of value to maximise the safety of a transaction. The escrow agent holds the funds or assets until it receives the appropriate instructions or until the fulfilment of pre-determined contractual obligations.
The importance of the right escrow provider
Given that the company providing an escrow service is in the position of serving as the ‘referee’ in a financial transaction where there may otherwise be mutual distrust between the two parties involved, it is vital that you only choose a trusted and neutral third party. It therefore makes sense to only use a big-name escrow provider, or at least one that has been recommended by another trustworthy party.Practical Application Example
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If, for example, your business is purchasing new premises, instead of immediately giving the seller the purchase amount, you may deposit the money into an escrow account, while setting out certain stipulations for the purchase to go ahead. These may include necessary repairs being undertaken to the property, or property taxes being paid. The money can then be released to the seller once those requirements are met, but the escrow provider will not return the funds to the buyer until the seller fails to meet their obligations. ”
