How Escrow Compliments Enterprise Risk Management

Businesses must have a clear understanding of the market in which they operate to remain competitive. Activities like acquiring subsidiaries, purchasing new equipment, and buying property can help a business operate more efficiently, but they can also open the business up to significant transactional risk.

Successful companies work to manage or mitigate risk in all phases of their business by developing an effective Enterprise Risk Management [ERM] program. One key component of a robust ERM plan that can sometimes be overlooked is escrow, and companies that effectively leverage escrow services can develop a key advantage – especially in times of great uncertainty.

Larger transactions and the digital economy equate to more risk.

As a business grows, so will the size of its transactions – that’s obvious. This is the reason why larger organizations almost always have an ERM plan in place. Large transactions, like an acquisition or a new headquarters, can take months or even years to complete, and that’s one of the reasons they are so risky. In addition, online transactions can carry additional risk of fraud because of the anonymity of the internet and the ease of which scammers can post false or misleading descriptions of products.

Consider the scenario where a business is up against a construction deadline on a large dollar project and a key contractor doesn’t deliver. If the organization has a robust ERM program, supported by an effective escrow agent, they will have a backup plan and the available resources to consider pivoting to a new provider. On the other hand, if they don’t have effective ERM plan, management could be scrambling to recover the project timeline, risk owing penalties, or even risk failure of the entire project.

Escrow services are a critical component of effective ERM.

Using an escrow service can help prevent fraud and nonpayment in complex transactions by adding a protective barrier. When properly protected by escrow, buyers can authenticate and inspect merchandise before payment is released, and sellers can send products without concern of nonpayment. This is because the funds for payment are set aside and overseen by a neutral third party.

In general, there are 4 options to consider when dealing with business risk: accept it, share it, mitigate it, or avoid the activity altogether – and thereby avoid the risk. Depending on the circumstances, management may decide to employ any of these tactics, but some are clearly more advantageous than others.

Accepting Risk and Avoiding Risk

First, accepting risk can be the most expedient method, but also the most disastrous. If the risk never materializes, then the organization has saved time and money that would have been used in mitigation. However, if the risk does materialize, the organization will deal with the repercussions. This method takes the least effort but carries the highest risk. Accepting risk should be a last resort with large, mission critical transactions.

Another option that can be disastrous to a growing business is avoiding risk at all costs. Businesses that choose to avoid any significant risk may be missing key opportunities for growth. Some level of risk is usually appropriate, depending on the business, so management of that risk is typically the best option.

Sharing and Mitigating Risk

The next 2 options, sharing and mitigating risk, are typically the most advantageous as they allow for conducting the transaction while reducing risk. These strategies are where business escrow services can be invaluable.

Using an escrow service allows parties to reduce the risks associated with large transactions by having a third-party act as a custodian of assets until the terms of the contract are met. This effectively eliminates the risk of the buyer losing cash in the transaction due to non-delivery. And on the other side, sellers receive assurance that the funds for the transaction will be available once they provide the contracted product or service.

For extremely large or complex business transactions, escrow services are invaluable to protect against insolvency or failure to deliver by either party. And while protecting the cash doesn’t solve the issue of a failed deliverable, it does secure the assets that can allow the business to find an alternative provider.

Business Escrow – The Key to Effective ERM

Escrow services can provide an additional layer of security for transactions during uncertain market conditions, like the COVID-19 pandemic. As we’ve seen over the past year, when products are in high demand, buyers can run the risk of paying for products that arrive too late, never arrive, or that are not of the agreed upon quality.

By utilizing escrow, buyers can be assured that they do not pay for products that don’t meet the specifications of the contract. Additionally, during turbulent market times, sellers may send products to buyers who have become insolvent or that are unwilling to pay in advance. Escrow removes that risk by ensuring that funds are available to both sides when the time comes.

Business escrow agents are not created equal.

Here at the American Deposit Management Co. [ADM], our goal is to simplify the escrow process for businesses while adding value to the process. That’s why we offer access to extended protection and competitive returns to our business escrow customers. This means your funds will have access to FDIC / NCUA protection for the entire balance without the standard limitations, and once your funds are ready to be distributed, we’ve got you covered with additional fraud protections – all thanks to our proprietary fintech.

In addition to safety, our proprietary network of banks and credit unions will compete for your escrow cash, so you get access to nationally competitive returns, without the limitations of traditional escrow services.

Earn More, Risk Less® with Fintech Powered Escrow Services by ADM

With the COVID-19 pandemic disrupting the economy, escrow protection has become critical for businesses who are struggling with the uncertainty. So, if you are a part of a business or government entity that is looking for escrow services or other cash management solutions, contact the ADM team today.

You can easily chat with one of our agents using the box at the bottom of your screen, or simply give us a call. Our team of professionals is our “secret sauce,” and we look forward to hearing from you.

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.

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