How Do Escrow Services Work for Small Businesses?

Escrow services are something most small business owners will become familiar with at some point in their careers While some industries use escrow services more than others, there are a few distinct situations in which every business owner will likely use an escrow account.

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, ensuring everyone involved in the business transaction gets what they were promised.

Escrow services are designed to keep both parties in a transaction safe, especially during business deals with many complicated steps, such as buying property, acquiring a company, or any other type of large transaction. Many people are already familiar with escrow services from dealing with their mortgage for their home.

How do Escrow Services Work?

The two parties conducting the transaction – usually the buyer and the seller (also referred to as the principals to the escrow) – will draw a list of items that need to be completed before the transfer of funds is complete called escrow instructions. 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 parties and the escrow will be closed.

When do Small Businesses Need Escrow Services?

Escrow services are generally required when transferring large sums of money between people or businesses. Escrow services can be used for all types of transactions, but especially for the following transactions:

Mortgages: For both personal and commercial mortgages, down payments and closing fees will go through an escrow service. Buying or selling real estate is complex and involves multiple steps that requires large amounts of time and money. To ensure all parties involved are in agreement and feel secure throughout the transaction, most small businesses choose to use escrow.

Property transactions: Purchasing a vehicle or other type of large property asset (including machinery, production equipment, or even non-mortgaged property) – especially from an individual — should be transacted through an escrow service. Any large scale purchase requiring a large cash outlay or 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 of the transaction are being finalized.

Online property transactions and transfers: Many business owners may choose to use escrow services for online transactions and transfers, even smaller transactions, like the transfer of a web domain or purchase of a web property. When doing business with a person you’ve never met, it’s best to exercise caution and execute transactions through a neutral third party whenever possible.

Your business is likely to require an escrow service at some time in the future – if you haven’t already. Work with a banker you know and trust for the smoothest process to completing these important business transactions. For more information on how Revere can help your business with its escrow services, call 866-950-5784 or send us an email.

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