Business Escrow Accounts: Everything You Need to Know

Since 2000, companies have completed 790,000 merger and acquisition deals for a total value of over $57 trillion. Other large business transactions – like real estate sales, intellectual property transfers, and the purchase of raw materials – have also increased substantially in both complexity and cost.

As the number and intricacy of business transactions increases, so does the risk. That is why companies should safeguard their transaction with business escrow services.

What are business escrow services?

Business escrow is a professional service offered by qualified escrow agents. These neutral third parties hold money, titles, or anything of value to ensure the terms of the contract are met.

The escrow agent is responsible for protecting assets throughout transactions and promptly releasing them when the terms of the contract are satisfied. This protection promotes smooth transactions for both parties and minimizes the risk of losses.

Why would a business need to utilize an escrow agent?

Risk management is the overriding reason for enlisting an escrow agent. That’s why these services are often used during transactions that leave the business open to significant risk of losses and during times when external factors increase the risk of transactions.

For example, many organizations were at risk of financial loss when counterparties shut down or went bankrupt during the recent pandemic. Escrow helped to reduce these risks by holding funds securely until all the contract terms were met rather than the buyer paying the seller directly.

Pandemic risks have eased, but the current geopolitical tensions and uncertain trade policies have created new types of risk that leaders must work to mitigate. Escrow helps to reduce these risks by providing assurance that the transaction will be completed as agreed or the buyer’s funds will be returned according to the terms of the contract.

An example of a situation that could benefit from a business escrow account:

Consider the following situation: Your company is making a very large order with a specialty supplier for a product with a long lead time. For the supplier to begin work on a project of this magnitude, they need assurances that they will be paid when the time comes.

If this supplier asks your company for a full up-front payment or a large deposit, you risk paying for products that never arrive or don’t meet the agreed upon specifications. Additionally, providing a payment or deposit without a 3^rd party guarantee could put your investment at risk, especially if the credit worthiness or reputation of the supplier is less than perfect.

In this case, you may ask that your funds are held in escrow rather than paid directly to the supplier. This way you are protected if the supplier becomes insolvent or doesn’t deliver your order as agreed.

Common Transactions That Benefit from Escrow

Business escrow isn’t just for buying goods from a supplier. It is also beneficial in any type of large, lengthy, or complex transaction. Some of the most common uses of escrow are mergers and acquisitions, buying or selling a business, intellectual property transfers, and real estate purchases.

Mergers and Acquisitions

Mergers and acquisitions transactions often include multiple parties who need assurances that each participant will act as required. Many times, these complex deals can take months or even years to finalize. In those cases, an escrow provider holds cash or other valuable assets securely until the parties make good on their obligations.

Buying Or Selling a Business

The purchase or sale of a business is also a lengthy transaction that requires a long period of due diligence. Escrow protects both buyers and sellers during this process by holding purchase funds securely and releasing them promptly following the conclusion of the sale.

Intellectual Property Transfers

Transfers of intellectual property are notoriously complex and can take a significant amount of time to complete. The escrow agent holds funds securely during these transactions and releases them only when the terms of the contract are satisfied.

Property and Mortgage Escrow

The purchase of land and the construction of a new building are lengthy transactions that can take years to finalize. Escrow protects a buyer’s investment during this time and ensures that sellers are paid promptly upon the conclusion of the transaction.

Most real estate loans also require the buyer to hold insurance on the property, as well as pay property taxes to local and state governments. Those payments are often assessed annually and, equally as often, lenders need assurances that buyers will pay those costs when the time comes.

These are examples of situations where mortgage escrow comes into play. Funds are set aside in the mortgage escrow account to provide confidence that they will be available when the time comes to make annual payments.

How can businesses find the right escrow agent for their transaction?

Unfortunately, not all escrow agents are created equal. The differences in how they secure funds can be critical to protecting the value of assets while they are locked away.

Safety is the most important feature of a business escrow account.

The strongest assurance for escrowed funds is the backing of the U.S. government through FDIC or NCUA insurance. However, the biggest hurdle with government protection is the limit of $250k per depositor, per account ownership category at each member depository institution.

Many business transactions are measured in millions of dollars, so this limit can leave a majority of funds unprotected. Fortunately, the right escrow partner can offer access to extended insurance with a single deposit.

Business escrow companies should have a strong reputation.

Since the overriding goal of escrow is security of funds, they must be protected at all costs. So, it is critical to partner with an escrow company that has plenty of experience in the business and a sterling reputation.

What about escrow fees?

When it comes to real estate transactions, costs vary by state, but the escrow agent is generally paid a percentage of the cost of the property. The party responsible for those fees — the buyer, the seller, or both — also varies by state.

In other types of transactions, each escrow provider has their own combination of fees and investments that go along with maintaining funds in their escrow accounts. These costs can vary between companies, so it is wise to discuss fees before choosing an escrow partner.

Choose fintech-powered escrow services by ADM.

At American Deposit Management, we offer escrow services that help businesses reduce risk in their large, complex, and lengthy transactions. Our solutions offer the ultimate security with access to extended government insurance for all escrowed funds.

With over 15 years’ experience in business escrow, we have developed a stellar reputation for customer service and risk mitigation. Best of all, our escrow services typically have no set-up or annual fees*.

If your business is interested in escrow services or other cash management solutions, don’t hesitate to contact the ADM team.

*Funds held for less than two weeks may be subject to a fee.

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