Escrow Account Automation in Business Banking

An escrow account is a pass-through account temporarily held by a third party when a transaction between two parties is underway. It is often operational until the entire procedure is completed and all the terms agreed by the parties are settled. Most small business owners may have heard about such accounts but often do not clearly understand its working and benefits.

Some industries like real estate widely use these accounts. There are certain instances when most business owners may need to use this type of an account. Here are three instances when this account would be beneficial

1. Mortgages

Personal as well as commercial mortgages often require escrow bank accounts for the down payment and closing fees. Selling and buying real estate properties is a long procedure and involves several steps. Furthermore, investments in this sector are large and therefore, using these types of accounts provides security to all involved parties.

2. Large asset-based transactions

While purchasing a vehicle or other large assets like equipment or machinery (especially from an individual), using an escrow account is advisable. This is because investing in such assets requires spending a huge amount. Furthermore, the transfer of ownership from the seller to the buyer may be a time-consuming process. Maintaining the cash deposits in such accounts while the procedure is being completed is a safer way and ensures the money is not misused.

3. Online transactions and transfers

Individuals undertaking online financial transactions and transfers must use escrow services. This is more important when the users are dealing with people they have never met before. Completing the transaction through escrow service offered by an unbiased third party is safer for both the parties (buyers and sellers).

4. Construction finance

In case a builder avails of construction finance from an institution, the funds are retained in this type of an account. The funds are made available to the builder only as per a pre-determined disbursement schedule. Furthermore, sale proceeds received from the buyers are also retained in this account. These receipts are not provided to the builder until the project is completed.

Working of escrow services

The principals of the escrow service (buyer and seller) mutually agree upon and finalise the escrow instructions. These are often the condition precedents that must be completed before the fund transfer is executed. The information is offered to the escrow officer (loan officer of the bank where the property title is held). On completion of these conditions, the transaction is executed. The responsibility of ensuring that all the terms and conditions have been met lies with the escrow officer before finalising the transaction.

When both the parties involved in the transaction have met their obligations, the property or funds held in the escrow account are transferred. Once such transfer is complete, the account is closed.

Benefits of escrow services

The primary objective of escrow services is the security and safety of the parties involved in the transaction. These accounts ensure funds are transferred only when the parties have completed their responsibilities as per the agreed terms and conditions. The funds are held by a third party until all the conditions specified in the agreement are successfully completed.

Using escrow services may seem like an extreme way of protecting the parties during a transaction. However, using these especially for complex transactions involving multiple steps is useful in safeguarding the interest of all the parties.