Escrow Accounts. It’s a term many have heard of but are unsure of what they are, other’s know what they are but don’t know how to set one up for their business. So this blog will focus on explaining 3 key aspects of an escrow account: what an escrow account is, how an escrow account works to benefit businesses and how you can set one up for your own business.
What is an escrow account?
An escrow account is a separate account owned by a third party. This third party will hold money/assets on behalf of two other parties. The first party will pay money into the escrow account, then upon pre-detrmined contractual obligations being met by the second party, the escrow account holder will release the funds to the second party. To simplify this please see the flow diagram below for how this works in principal:
First Party Pays into Escrow Account > Escrow Account Holds Payment Securely > Second Party Completes Contractual Obligations > Escrow Account Releases Funds to Second Party on Behalf of First Party
How an escrow account benefits businesses
The main benefit of using an escrow account is the security of payment for both parties. Let’s say you’re a web designer and have been messed about with payments in the past so want a much more secure way of being paid. Before starting the work you would write up your contractual obligations (deadlines, requirements etc) and send this to your client. Your client approves the terms and then pays your money into a secure escrow account. So two things now happen:
- You’re happy in the knowledge that the client has already paid the money and are happy to do all the work
- The client is happy knowing they have paid the money BUT it won’t be released to you until you meet all contractual obligations.
It’s a win/win for both parties and allows everyone to know where they stand with the payment. Then once you have completed the job, the client simply confirms this to the escrow account and the money is released to you with immediate effect. No 30 day invoice etc!
And if you’re still worried about the client having the power to not pay you (by simply telling the escrow account a blatant lie), then as long as you have proof that you’ve completed the work as specified in the terms then the escrow account will release the funds. Happy days!
How to setup an Escrow Account
So if you like the sounds of this concept and want your own escrow account for clients then here’s a simple method of setting one up. Disclaimer time! There are lots of escrow account services across the globe so be sure to check them all out before deciding upon one. We’re just showing you one of the companies which we have used in the past and personally found it very simple to use – we are in no way being paid or benefiting from the third party by writing this blog.
All you need to do is visit Transpact’s website here and fill in all your details to register – simple as that. We found Transpact’s service to be simple, cost-effective (free to sign up then a small transaction fee per payment) and very secure (it’s actually been authorised by the Metropolitan Police!) for UK-based businesses.
Then once signed up, to actually create and submit an escrow payment just follow the simple steps below:
- Go into your account and click ‘Create a Transpact’ – here you can fill in all the information about price/payment terms etc for each job.
- A confirmation email with all the information, terms and conditions is then sent to you and your client – you must both agree to these terms.
- The client then securely pays the amount specified directly to Transpact.
- Once you’ve completed the job, the client simply releases the funds via their Transpact email.
And that’s it, you’ll have successfully added a new payment method to your business!