In the current economic climate, with low rates 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.
What are business escrow services?
An escrow agent is a neutral third party that holds money, titles, or anything of value to ensure the buyer and seller involved in a transaction meet their obligations for the transaction to take place.
Why would a business need to utilize an escrow agent?
The overriding reason for utilizing escrow is risk management.
When two or more companies make a business deal, they are generally sharing some risk involved with the underlying transaction. During the recent pandemic, many organizations were at risk of financial loss when counterparties were shut down or went bankrupt. 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. 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 helps to ensure 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.
Property and Mortgage Escrow
As you learn quickly when you buy a tract of land or an office building, there’s so much more to the cost than the actual price of the property. Most mortgages require the buyer to make a down payment and pay closing fees to complete the transaction. In addition to these upfront costs, the buyer is usually required to hold insurance on the property, as well as pay property taxes to local and state government. Often, those payments are 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. These services are critical for buyers and sellers to protect their interests while the transaction is being negotiated and finalized.
How to find the right escrow agent 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. In fact, there are a few important differences between escrow providers and some key features 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 account ownership category at each member 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 meet your needs, 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.
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.
What about escrow fees?
When it comes to real estate transactions, costs vary by state, but generally you will pay an escrow agent a percentage of the cost of the property. The party responsible for those fees — the buyer, the seller or both — also varies by state.
At the end of the day, it’s all about securing your investments — whether that be the purchase of a new home or software to build your business. And that’s something we can get behind.
If your business has encountered the need for an escrow account, there are some important facts to consider before you choose a provider. Each escrow provider has their own combination of fees and investments that go along with maintaining funds in their escrow accounts. That’s why it’s important to keep in mind that escrow agents are not all created equal. At ADM, our proprietary fintech allows us to provide your business with the MOST FDIC protection and the MOST return on escrow cash while it is secured in your account.
Earn more, risk less™ with fintech powered escrow services by ADM
Our team of professionals is our “secret sauce,” and we look forward to hearing from you. If your business is interested in escrow services or other cash management solutions, don’t hesitate to contact the ADM team.
You can easily chat with one of our agents using the box at the bottom of your screen, or simply give us a call. We don’t operate a call center, and if we aren’t available, we will always return your messages.
For more updates on how to manage business cash and to stay abreast of interest rate changes, banking industry insights and other valuable financial information, be sure to check out our Insights page and follow us on social media.