The use of escrow accounts It is increasingly popular, it is very likely on several occasions you will hear its name or that it has been asked when paying for an important purchase.
If so, but you do not fully understand what it is about, this post is to clarify all the doubts about these types of accounts.
- What is an escrow account?
- 4 common instances to use an escrow account
- Importance of involving an intermediary
- How does an escrow account work?
What is an escrow account?
Simply put, an escrow account is managed by an impartial third party who holds the funds during a transaction. That is, it serves as a warranty intermediary service to prevent any exchange-related fraud or scam from happening.
Although it is used for high value operations, it is also available in smaller amounts. Escrow accounts have been in operation for several years, but their usefulness was confined to the commercial and financial sectors.
This kind of guarantee fund is very common in the US and other countries for withhold money related to mortgage payments. It is also used in business acquisitions and mergers, major business deals, and more.
With the advent of the internet, the disruption of other technologies and the rise of the digital economy, the escrow account is now more widespread.
It works as a space that facilitates a safe exchange between the parties. This has become common when buying stocks, assets, funds, and even currency or crypto exchanges.
It is important to know that setting up an escrow account is not something simple and requires certain computer resources that not all of us have.
For this reason, there are platforms that offer this kind of service or there are websites that apply this system organically to facilitate transactions between their users.
4 common instances to use an escrow account
Today, with economic growth and the increased flow of operations, the escrow account sounds like a logical and necessary solution. Taking its background and adding other situations, it is frequently used to:
- Buy goods and services. The escrow account can be applied in any situation of purchase or sale. Their role is to serve as an arbitrator who ensures that those involved comply with the established terms.
- Help landlords and tenants. These relationships are often complicated and an impartial broker can be very helpful. In this case, it is provided to protect the interests of both in the resolution of an economic dispute.
- Buy a home. With so much money involved, this guarantee fund is a practical solution in sales operations. As long as everything is in a neutral place, the parties can rest easy about protecting their interests.
- Make monthly mortgage payments. Although it is not as common as a direct discount, this specific situation has its practical side. Owners can use an escrow account in order to set aside money that they do not want to spend on other things.
Importance of involving an intermediary
Due to the fact that the largest number of transactions between people and companies occurs at a distance, it is necessary to rely on a reliable system to make these exchanges.
Escrow also stem from a growing culture of internet fraud. Hence, this digital process has greater adoption among stakeholders.
In this sense, the buyer is concerned about his investment and receiving the products or services as expected. The same happens with the seller, who wants to be sure that they have paid what was agreed.
This is resolved with the escrow account, which facilitates secure digital transactions.
How does an escrow account work?
The operation could not be simpler and clearer:
The buyer can place the funds in an escrow account that is part of a platform managed by someone else. This third party releases the money to the seller only when the conditions defined in the agreement between both parties are met.
The recipient of the funds cannot withdraw them from this guarantee deposit if they do not satisfy the agreed conditions.
This middleman solve any trust issues for different operations, especially when there is a lot of money at stake. It is a way to combat the climate of mistrust that exists between buyers and sellers.
On the other hand, an escrow account has a clearly defined timeline that eliminates speculation. Through it, those involved can follow the movement of money and the progress of the agreement. Since this process is overseen by pro-no-one experts, there is less to worry about.
In addition to fighting fraud, escrow accounts are very helpful in sectors such as cars, law, and intellectual property.
Entrepreneurs, new businesses and startups can leverage this system to minimize risk related to their most critical operations, such as supply chain, procurement, professional services, etc.
The escrow account it can be a practical solution to end the problems of mistrust between buyers and sellers. In an increasingly fast, changing and digitized world, these platforms have been adapting to meet the need to cultivate lasting relationships.