Importance of Escrow Services in International Trade
Unless buyers and sellers agree to advance or credit payment terms, international trade transactions are usually secured by established payment mechanisms that are administered by a third-party bank. However, using letters of credit and other established mechanisms can sometimes be too costly or inappropriate, while advance or credit payment terms can provide asymmetric benefits and risks to buyers and sellers. That is where escrow services can help.
An escrow service is simply an arrangement where a trusted third-party (such as an international bank) acts as an intermediary between buyer and seller. The buyer will place the payment amount with the escrow service, who will then hold those funds and only disburse them to the seller once the goods are shipped and other conditions, as may be stipulated, are met.
These conditions can vary from deal to deal and can include time for the buyer to inspect goods before payment or for payment to be made on a particular date, provided other requirements are fulfilled. Therefore, an escrow service benefits both parties and protects against fraud.
Why They Are Important
Escrow services can be especially important when a buyer and seller are embarking on a new relationship where trust has not yet been fully established. It is an excellent mechanism for sellers to limit their risk of buyers defaulting and for buyers to limit their risk of fraud. Furthermore, the fees for escrow services, which are often less than traditional instruments such as letters of credit, can be shared by both parties or borne entirely by one or the other.
Things to Keep in Mind
Make sure to diligently asses the trustworthiness of your escrow service provider. It is a good idea to choose a reliable international financial institution, such as Euro Exim Bank, with an unblemished track record of trust and reliability.
Also remember that it is usually impossible to use an escrow facility to secure any kind of financing for production or cash flow purposes, while it is possible to do so with some other mechanisms. Euro Exim Bank is an international bank focused on cross-border trade and offers all of these services and more to empower import/export businesses.