Business Escrow Accounts: Know the Differences

Business escrow account companies are not created equal.

In the current economic climate, with the recent business tax cuts and seemingly endless cheap money, many businesses are opting to make major investments, mergers or acquisitions. When the time comes for these large, complex or risky transactions, all parties involved should look to protect themselves by securing funds in a business escrow account.

When would your business need to utilize an escrow account?

There are a multitude of different reasons that a business would need an escrow account. The overriding reasons for utilizing escrow are for protection and risk management.

When two or more parties enter into a deal together, they are generally sharing some risk involved with the transaction. Escrow helps to reduce that risk by holding cash or other valuable items in a safe place to provide assurances that the transaction will be completed as agreed.

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. The lead time on this order is long, maybe over a year. In order for the supplier to begin work on a project of this magnitude, they need assurances that they will be paid when the time comes. They might ask for a deposit, up-front payment in full, or for the funds to be held in escrow. This provides a guarantee that they will be compensated appropriately when they complete their side of the bargain.

On the other hand, if this supplier asks your company for an up-front payment, you may consider escrow as an alternative to putting your funds at risk. For a transaction of this complexity, the deposit is likely significant. Providing that deposit without a 3rd 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, just in case the supplier doesn’t make good on their end of the bargain. This way you are protected if the supplier becomes insolvent or doesn’t deliver your order as agreed.

This same scenario can be applied to mergers and acquisitions where multiple parties need assurances that each participant will act as required. In many cases these complex deals can take many 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. Some other examples of transactions that commonly utilize escrow include the sales of real estate and intellectual property.

How to find the right escrow company for your business transaction?

Unfortunately, not all escrow providers are created equal, and the differences in how they secure your funds can be critical to maximizing the value of your assets while they are locked away. There are a few key differences between escrow providers that you should know:

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

First, the safety of your funds is paramount, so you should make sure you understand exactly how your escrow company plans to secure your funds. Be sure to research the providers you are considering, and verify they have a strong reputation. After all, you are trying to protect your funds, not put them at further risk. The strongest assurance you can get for your funds is the backing of the U.S. Government, and FDIC protection can provide that security.

The biggest hurdle with FDIC protection is the limit of $250k per depositor, per depository institution. Many business transactions can be in the millions of dollars, so this limit can be restrictive to many organizations. However, with the advent of fintech, it is now possible for certain high-tech escrow providers to increase this limit to $100 million, with a single deposit.

Your business escrow account should earn a competitive return on your cash.

As we mentioned before, the first goal of an escrow account should be safety, but once that goal is accomplished, you should look for your escrow provider to earn a competitive return on your cash until it is released. After all, idle funds are the enemy of effective cash management.

In order to obtain the most competitive return on your escrow funds, you should enlist an escrow company that has the technology in place to optimize your return. This is most effectively accomplished through advanced financial technology that allows banks to compete for your funds. If your funds are locked away without earning a return, your escrow account is simply an expense, and you are leaving money on the table.

Your business escrow company should have a strong reputation.

Since the overriding goal of escrow is security of your funds, they must be protected at all costs. So, it is critical to make sure the escrow company you choose has plenty of experience in the business and a sterling reputation. At ADM, we have been in business for over 10 years and have received awards and recognition for our efforts. Our proprietary fintech ensures that up to $100 million of your funds are 100% protected with FDIC insurance and growing at the most competitive rates available. By applying our fintech to the escrow process, we have created an advantage for your company that few other escrow companies can match. So, if your company is in the market for an escrow provider, contact a member of the ADM team today.