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How Do Escrow Services Work for Small Businesses?

March 7, 2014

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Escrow services is a term that many small business owners have heard, but many might not know exactly what it is, how it works, and how it can benefit them. While there are some industries that use escrow services more than others, there are a few distinct situations in which every business owner will likely need to use an escrow account. To help clarify how escrow accounts can be used and how they can benefit business transactions, we’ve rounded up some information for small business owners.

What are Escrow Services?

An escrow is a deposit of funds for goods or services that are to be delivered to a specified recipient upon completion of an agreed upon condition or event. The funds are held by a third party and are only released when both parties of an agreement have fulfilled their duties. This ensures that everyone involved in the business transaction gets what they were promised.

Why are Escrow Services Useful?

Escrow services are designed to keep both parties in a transaction safe. They make sure that funds only go through after both parties have met their agreed upon obligations and are satisfied with the business transaction. It may seem like overkill, but it’s very useful for business deals that have a lot of complicated steps, such as buying property, acquiring a company, or any other type of large transaction.

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How do Escrow Services Work?

The buyer and the seller (also known as the principals to the escrow) will draw up escrow instructions. This is a list of items that need to be completed before the transfer of funds is complete. This information is delivered to the escrow officer, usually the loan officer at the bank where the title of the property to be transacted is held. Once this step is finalized, the transaction process can take place. It’s always the escrow officer’s responsibility to make sure that all of the instructions in the escrow agreement are met and properly executed before the transaction is finalized.

After both parties have met their escrow obligations, the funds and/or property deeds or documentation will be transferred to the appropriate party and the escrow will be closed.

When do Small Businesses Need Escrow Services?

Escrow services are generally needed whenever there is a large sum of money being transferred from one person to another, or from one business to another. Escrow services can be used for all types of transactions, but there are a few distinct transactions that almost always go through escrow.

Mortgages: For both personal and commercial mortgages, down payments and closing fees will go through an escrow service. Since buying or selling real estate is a complex process that involves many different steps, and a hefty investment in both time and money, it’s a smart way to make sure that everyone involved is on the same page and feels secure about the transaction.

Property transactions: Purchasing a vehicle or other type of large property asset (machinery, equipment, etc.) – especially from an individual—should be transacted through an escrow service. Any large scale purchase that requires a large cash outlay and a transfer of ownership will have a longer processing time, so it’s important to have any cash deposits for that transaction in a secure place while the details are being finalized.

Online property transactions and transfers: Even smaller transactions, like transferring a web domain or buying a web property may need to go through an escrow service. If you’re doing business with a person that you’ve never met before, it’s always better to exercise caution and execute transactions through a neutral third party.

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